Evaluating between two options

[David U.]

Hi everyone, 

I'm trying evaluate between two options. I currently have to apartments that I rent out. Both are owned without any debt. One is STR and one is LTR. After all fees, taxes, management and cleaning, i have cash flow of about 2000.

I'm trying to evaluate the two different ideas for adding the next unit.

Option A, I keep saving all cash flow to buy the next unit with cash.

Option B, I take out a mortgage on the third unit and apply all spare cash flow to paying down the mortgage as soon as possible. The deal doesn't cash flow in the beginning because of the mortgage payment, but will once the mortgage is paid off. 

What calculations should I use to Evaluate these two deals? 

Option B, would have a negative cash flow of 200. So, I calculated a 25 year mortgage and 1800 of additional payments per month. It would be done in 5 years and 2 months. I took the new property and assumed a 3% appreciation during that time, which is slightly under the historical average for the area.

(Total value of the property after 5 years with 3% appreciation) 

Vs.

(saved down payment) + (2000 per month positive cash flow for 5 years and 2 months  all invested at 5% interest.

I come out a touch over 50k ahead on option B, but I'm probably missing something

I realize there are other ways to do it, but I wanted to see if there is something else I should be considering when weighing these two specific choices.