COC returns, leveraged versus buying all cash

[Sean Gallagher]

So a good COC return is a lot easier to obtain when using leverage. When purchasing all cash on the same deal it's a lot more difficult to get a similar COC return, the numbers aren't even close. If purchasing all cash do we just accept a smaller COC return?

How differently are you analyzing deals when going all cash?  I liked the idea of cash because purchasing is a lot easier (don't have to deal with banks), a lot less risk, more cash flow per property.  And even though I would have a lot of cash tied up, I would always have the option to cash out refi.  Of course it's a give and take between the two..  higher risk higher return potential.  I just think I'd rather have 10 paid off properties vs 50 leveraged.

[Greg Scott]

Real estate makes us money several ways; cashflow is only one.  If given a choice between one paid-in-full property and two identical properties with 50% leverage, the latter will always out perform in the long run.  

The other problem with unlevered properties is that more of the cashflow is exposed to income tax. It is fairly easy for depreciation to shield 100% of the cashflow from leveraged properties. If you do the math on after-tax cashflow, there is a strong case for leverage.

Returns aside, leverage is a deterrent against frivolous lawsuits and title scams.