Investing or buying cashflow?

[Chris Gordon]

Want to get the more experienced folks' opinion on something I'm thinking about....

It's easy to increase cashflow with a greater downpayment / less leverage. However, is that really investing or something akin to buying an annuity?

I don't think there's anything necessarily wrong with buying a cashflow stream; it's dependent on your goals. However I don't think it's necessarily investing in the Warren Buffett sense of the word.

I'm interested in if everyone thinks this is a distinction worth  making? If so what's a good way to quickly determine the difference? Cash-on-cash return or Return-on-equity? Cap Rate? Whatever the opposite of cap rate is: figuring out what the returns would look like if you were to 100% leverage the property? 

thanks

[Jay Hinrichs]

@Chris Seveney  that's interesting.. lets say you buy a rental for 100k with minimum down  20k.

you make 150 a month cash flow ( realistic numbers unless you value add or get some smokin deal)

something happens and you need to sell in 5 years

you bought for sake of argument in a non appreciating market as many on this site admit they are fine with..

now you go to sell.. 60 X 150 a month = 9k   you have 10k in sales costs.. figure 6% plus closing cost plus seller credits and honey dews on the house plus it makes the math easy.

so you net 90k add in your 9k positive cash flow your at 99k... so just about break even but now your had to recapture 15k of deprecation and pay tax on that lets say 5k for easy math.. so now over a 5 year hold your 150 a month Coc really has a negative IRR since you lost right at 6K of actual cash and your only gain is whatever little principal pay down you got on your longer term note.

Do you think I have that right.. only reason I bring this up is I sold a bunch of my rentals and that recapture hit me hard personally.. but I just wanted to reposition to notes as I am not a very good landlord..

I think this is why if you think my numbers are correct.. that folks need to accelerate pay down so that you can pay these off quick so if U do need to sell and most people sell every 7 years stuff happens they have some true equity. or at least some cash coming out of the deals.