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All-cash or debt? The answer to this depends on what return metrics you are looking for and the specifics of the property being considered. In this video, Michael shows you exactly how to analyze a property and establish what financing strategy works best for different deals. --- Transcript   Michael: Hey, everybody, welcome to the remote real estate investor. My name is Michael Albaum and today I'm joined by   Tom: Tom Schneider.   Emil: Emil Shour.   Michael: And on today's episode, we're going to be talking about some of the different ways to evaluate properties and determine whether or not it makes sense to purchase them with debt or with all cash. So let's get into it.   Alright guys, so Pierre and I were chatting last night, and we were doing some evaluation on different types of properties. And what we were noticing is that some properties are better purchased with debt, and others all cash, have you come across the same thing?   Emil: I have, when you, you actually pointed that out? When we were I think doing some type of video, like how to analyze a property, and we're looking at different properties. And that came up where I didn't even realize that that was a thing, really. But you're right, in that some properties, the cash on cash, debt won't always juice the cash on cash return.   Tom: Yeah, I mean, just the return profile can can shift quite a bit with leverage leverage. So you know, obviously, increasing your loan to value ratio is going to would be a like, more aggressive thing to do. So if there's like changes in the value of the home, you know, by having a you know, by getting as much debt as possible, there's, you know, risk of the value of the home getting to the other side, which would be like, deemed underwater.   And then on the actual yield side. You know, depending on how much cash flow you want to make in a month, if you're using all cash to buy, you're going to have much more cash flow, but it's, you know, obviously, a higher upfront costs, gosh, I don't like him using the word obviously, all the time. It's a good good feedback from from Pierre because…   Michael: It's not obvious Tom.   Tom: It's not obvious. So anyways, it's a different return profile. And it depends on your risk tolerance, and where you are in your kind of time horizon of if you're planning to, you know, need to live off the cash flow, or all that kind of good stuff. So go ahead, Michael.   Michael: Depending on your strategy for investing is often going to dictate what types of properties you want to be looking at, and then also how you want to be purchasing those properties. So for anybody listening to this podcast, we're actually going to be doing on the doing a screen share here in a minute, and showing some visuals about how I go through the property analysis section, and determine whether or not this property is best fit for an all cash purchase, or a finance purchase.   So for those of you listening at home, or listening on the road, or not watching the YouTube version of this, the list price is 75,000. The current rent on it is $975 a month. And what I'm gonna be doing is walking through just how to evaluate this property, but also how to look at some of the different ways to purchase the property.   And what I mean by that is Tom, Emil, and I could all be looking the exact same property. And depending on how we purchased it, Tom could use all debt, Emil could use 50% financing, and I could use 20, or rather 80% financing with a 20% down payment, the performance of that exact same property with the same income and expenses could look vastly different for the three of us.   And so what I'm gonna do is I'm going to scroll down the page and click on financials. And then I'm going to start playing around with some of the assumptions here. And the first thing I like to do is put the down payment up to 100%, which is significant, or rather indicative of an all cash purchase. And for those of you following just listening to this, what our metrics look like now is we have an a cap rate of 9.6, a cash on cash return of 8.6 and a monthly cash flow of $545 a month. And again, all I did was change the downpayment to be reflective of an all cash purchase again at a $75,000 purchase price with a monthly rent of 975.   So next what I'm going to do is whip the downpayment slider bar all the way down to 20%. And I'm going to kick our loan interest rate up to four and a half percent. Because based on the time of this recording, I think that's fairly reasonable for investment property for somebody with good credit. So now what we see is a cash on cash of 17.3% and a monthly cash flow of $241.   So now what I want to start doing is playing with the downpayment slider bar, as well as the loan interest rate slider bar. And based on my personal experience, what I've seen in the past is that there are loan interest rate breaks at every five percents of additional downpayment that you add, so if we slider down payments slider bar up to 25%. Let's drop our loan interest rate down to 4%.   And what we see is our cash on cash is actually down at 16.2%. But our monthly cash flow went up to 276. So what we just saw is that we lost a little bit in terms of our metric in terms of how hard each dollar is working for us. But we generated additional dollars in terms of cash flow. And that makes sense because we took on less debt because we put a bigger down payment, which means we have a smaller mortgage payment, which means we have more free and clear cash flow coming to us each and every month.   But what might seem counterintuitive, is if you're maximizing or looking to maximize your cash on cash return as a metric, here is an instance we're actually taking a higher interest rate gets us better performance.   So again, what I did is I reduced the downpayment back to its 20%, I kicked our loan interest rate up to four and a half, and our cash on cash was 17.3, monthly cash flow to 41. Then I bring our downpayment back up to 25%, I dropped our loan interest rate to 4%. And our cash on cash is 16.2, monthly cash flow of 276. So we lost a good 1.1% in terms of our cash on cash metric, and we gained about $35 a month in terms of cash flow.   Let's do that again. And kick our downpayment up to 30%. And this time, we'll drop our loan interest rate only a quarter percent down to three and three quarters. And now we're down to 15% cash on cash, but our monthly cash flow is up at $302. So again, here's another instance, where actually lowering the interest rate that we have on this loan, decreases our return metric, in terms of cash on cash.   Now, it's really, really important to understand this because it's not uniform across every single property, we can't say that, hey, if I get a lower interest rate, that'll actually hurt my cash on cash return, often that'll help us. But based on this particular property criteria, again, the purchase price, the income and expenses, which we haven't touched by the way, all we're doing is changing the structuring of the financing. That's what have what's what's having these massive impact on the property's performance.   Now, let's take another example. Let's kick our downpayment back down at 20%. Let's put our loan interest rate back up at four and a half. But let's change the purchase price of the property. And let's make it about $100,000. Now, again, I haven't changed anything else about the property haven't changed the the income haven't changed the expenses, all I've changed is the purchase price. And I want to see if I can't get this property to demonstrate kind of unique phenomenon.   So again, purchase price of 100,600, monthly rent of 975. And by the way, for anybody listening or watching that says there aren't 1% properties out there. Here's a prime example. It's listed for I think 75,000 rent at 975. That's almost like what a 1.2 1.3% property.   So let's get back to business here. So if we increase our purchase price 100 100,600 our downpayment down at 20%, our cash on cash is 9.3%, with a monthly cash flow of 174. Now if I put my downpayment up at 100%, again, signifying an all cash purchase, let's see what happens. Our cash on cash drops to 6.8%. But our monthly cash flow jumps up to 582.   So again, we're seeing a bit of that inverse relationship here, we are sacrificing in terms of the percentage cash on cash return, but we are generating additional dollars in terms of actual cash flow. So what I'm gonna do is same exercises before, I'm gonna drop my down payment all the way down to 20%, which takes us back to 9.3% cash on cash and 174 in terms of cash flow. And I'm going to incrementally ratchet up the downpayment. So now we're at 25%, and I'm going to drop our loan interest rate accordingly to 4%.   Now, our cash on cash jumps to 9.7%, and our monthly cash flow jumps up to 221. So here is actually the opposite example of the prior example, in the prior example, when it was listed at 75,000, and we dropped our interest rate down to 4%. But increase your down payment to 25%. We actually had a reduction in our cash on cash return, but an increase in monthly cash flow. Here we have both an increase in monthly cash flow and an increase in our cash on cash return.   So let's do that again. Let's kick this up to 30% in terms of our down payment, and we'll drop our loan interest rate to three and three quarters. Now our cash on cash is down at 9.5. And our monthly cash flow is up at 255. So again, this example when we increase the downpayment but decrease the loan interest rate, which we would think would help us get a better return. We are actually getting a lesser return in terms of cash on cash, we went down from 9.7 to 9.5%. But our monthly cash flow went up and again that's because we are taking on less debt, which means we have a smaller mortgage payment.   So if you were trying To optimize this property for performance with regards to cash on cash return as your metric, you would actually be better served, putting a lower down payment on the property and paying a higher interest rate, which is very counterintuitive. Oftentimes, we think, oh, lower interest rate, that's the best way to go. Not always. So again, this is to demonstrate that it's important to evaluate the property on its specific merits, and evaluate each and every property as an individual, it's really difficult to make blanket statements to say, Oh, this type of interest rate with this kind of debt is going to be better or worse than this.   So again, based on this property specific income and expenses, and based on the purchase price that we've given it 100,600, we can manipulate the down payment and interest rate in such a way to force the property to behave and to perform in a way that's in line with our buy boxes.   And by the way, if anybody listening to this are familiar with the buy boxes, we talk about it all the time in the Rooftock Academy, but it's basically a parameter or set of parameters or a framework to work within, that helps identify what makes a great investment property for you versus what just noise. And so whether you're part of the Roofstock Academy, I encourage you to make one if you're not part of the Academy, definitely encourage us to make a buy box as well, it's really important to get very clear on what your goals are.   Because, again, Tom, Emil, and I could all be looking the exact same property. And if Tom buys it with cash, Emil with 50% financing, and I use 20% down, we're gonna have vastly different performances. And thus, it could meet Tom's by box, and it could be outside of Emil, and mine, or vice versa. So again, the debt structuring is hyper critical. And this is a really great way to play around with some different scenarios and determine what's possible, what's feasible, and what might work well, for you.   Tom: Awesome. Love it.     Emil: Yeah, great. I remember you show this to me months ago, it was like a year, year and a half ago, I had no idea that like certain certain property prices and stuff like you, you can actually go negative or in the wrong direction with your cash on cash or yield by putting more debt on the property, which I always thought, you know, more debt, better yield, but not always true.   Tom: What I liked about this exercise is sometimes you have a certain amount of capital that you want to deploy, right, it seems like a lot of you are probably looking for more capital, you need more capital, but sometimes, like I have, you know, I'm just gonna make up a number I have $50,000 that I want to spend that I want to get to work. And, you know, if you if you don't need to use that extra debt, and you're still getting that same cash on cash return whatnot, this is a great exercise to you know, model out, you know, deploying exactly how much money you want to you know, at these pro forma returns.   So, I got a good one. So, complex is used to to refer to the level of components in a system. If a problem is complex, it means it has many components. Complexity does not evoke difficulty, on the other hand, complicated refers to a higher level of difficulty. So, this kind of exercise is complex, right? There's various components into it, that we're moving these variables to get the kind of return that we want. But it's not complicated. It's not, you know, brain surgery. It's not flying to the moon or something, you know. Anyways, love it. Great exercise, Michael.   Michael: Yeah. Well, the other thing to remember, too, is the complicated part. There's only two variables, it's it's down payment and interest rate. The end once you once you get to that point, you've already done the hard stuff, you've already figured out what the income and expenses look like, on that property. So now you're just figuring out well, how much money do I put down? And what kind of interest rate can I get on it?   So I love that complex versus complicated. That's, that's great. But I encourage everybody to do this exercise on any property, you're interested in investing, and even on those that you're not because what you're gonna see is the different levers that you pull and how they affect one another. So play around with different properties, different downpayment, different interest rates, see what kind of returns you're able to create. Because I think that's the big the big thing that separates Great Investors from good investors is those Great Investors are able to create and generate their own returns, independent of what others say they can or cannot do.   Alright guys, shall we'll get out of here?   Tom: Yeah this is a good one.   Emil: Yeah.   Tom: Great One.   Michael: Awesome. Well, thanks, everybody for tuning in. Whether y ou watch it or listen to it, hopefully this was helpful. If you liked the episode, feel free to give us a rating and review wherever you listen to your podcasts. Those are really, really helpful for us. And, as always, if you want to hear about something on an episode, or have a topic idea, feel free to leave us a comment and we look forward to seeing the next one. Happy investing.   Tom: Happy Investing   Emil: Happy Investing