Leverage vs. Own Cash Explained

This example can be used with clients or prospects when they do not see the value of using leverage when they have the cash to use. They don’t want to “get into debt.” They do not understand “cash on cash” return. Cash on cash return is calculated by dividing the monthly cash flow x 12 by the amount of cash initially invested.

It is useful to have the client/prospect do the calculations so that they experience the analysis vs. a lesson.

Two Investment Properties

Client has 100,000 Cash

Option 1

Buy 1 home cash for $100,000

Rent for $1000/mo.

Expenses $200/mo.

$800 Net/mo.

$800x 12 = $9,600

9.6% cash on cash return

Option 2

Buy 5 homes using leverage at 20% down on each home

Each House rents for $1000/mo.

Each house expenses are $200/mo.

Each house mortgage is $400/mo. ($80,000 30-year fixed loan at 4.5%)

Each House net is $400/mo.

400 x 5 = $2000/mo.

$2000 x 12 = 24,000

24% cash on cash return