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Cash Flow vs. Equity: Which Pays Off for Investors in the...

As I’ve been searching for topics to write about, in terms of finance and real estate investment are concerned, I keep running across the different ongoing conversations regarding equity and cash flow. I use the story to help clients compare small vs. big down payments, making the scheduled payment on your property or paying more, getting a long term mortgage (like 30 years) or a shorter term mortgage (15 years), and the reasons why you should consider these different options every time you get financing for property. Each cousin has $50,000 in savings. Then, on top of that, any cash flow that is achieved by renting out the second unit should be put toward the monthly mortgage payment, and Cousin A might even be able to pay it off faster than 15 years. Just as in Cousin A’s duplex, Cousin B’s duplex is kept up, and it appreciates at 3% per year. Cousin A Cousin B Purchase Price: $250,000 $250,000 Down Payment: $50,000 $8,750 Loan Amount $200,000 $241,250 Interest Rate: 3.75% 4.00% *Monthly Payment: $1787 $1485 Difference in Monthly Payment: $0 $302 Equity: $50,000 $8750 Cash after Down Payment: $0 $41,250 Rental Income: $1500/mo $1500/mo Cash Flow -$287/mo +15/mo Appreciation 3%/year 3%/year For the next five years, everything goes as planned for both Cousin A and Cousin B. He can make the mortgage payment for many years with just his savings alone. I give you this story to illustrate a few points about residential investment real estate, real estate finance, and money in general. Here’s my take: The Takeaway Cash vs. Equity Cash is liquid money and is absolutely essential when you finance real estate. Value vs. Financing The value of a residential property will go up or down regardless if you have a mortgage on the property.