The Power of Leverage

[Logan McKay Zylstra]

I think often newer investors get caught up in cash flow. While I certainly see how cash flow enables people to achieve financial freedom; leave a W2 job, retire early, or allow them to chase any dream they might have. There are other benefits to real estate beyond cash flow. In this post, I want to look specifically at appreciation.

While, I’m not saying that cash flow or making enough in rent to cover costs isn’t important, because it is important. I believe that real wealth generation is created through appreciation. Whether that be forced (fixing up a property, increasing rents, etc.) or market appreciation. Being able to leverage real estate, creates the ability to create massive cash on cash returns during the sale of a property that has appreciated.

Again, I think having strong cash-flowing assets is important, but if you are wanting to achieve a substantial net worth, there needs to be room in your portfolio for assets that you make or believe will appreciate.

[Kevin Sobilo]

I disagree for a few reasons.

There are 3 basic ways that a landlord makes money:

#1 is cashflow. Its #1 in my mind because you have the most control over it. If you choose a good property and manage it well you can control over the long run how the cashflow performs. In addition, its about WHEN you get money. Cashflow puts actual dollar in your pocket NOW and as you go. Money TODAY is worth MORE than money in the FUTURE. In addition, there are tax benefits to this money such as depreciation.

#2 is paying down the mortgage principle. You have control over this and the debt you take on which is great. Paying it down is predictable which is also good. However, since you don't have ready access to the money its not as good as cashflow. To use this equity you either need to refinance or sell the property and both of those things can be expensive. So, to actually realize the gain, you have to incur an expense and possibly income taxes (if you sell). Additionally, your mortgage principle could disappear if the market softens!

#3 is market appreciation. You have NO control over it! So, its speculative. In addition, like #2, you can only access the value by refinancing or selling which can be expensive.

If you want a 4th way to make income that would be to improve the property. It isn't purely a landlord item as people flip properties or do BRRRR rehabs often before renting them. So, my improving a property with a rehab or by managing them better you can force the value to rise. That is great, but again the value is tied up in the property. Its expensive to access and it can disappear if the market softens.

So, for all of those reasons, I still believe cashflow is KING! I still do put a lot of effort into #4 and of course #2, but #3 is just a byproduct. Its gravy, my deals would be fine no matter what happens with #3.