Cash Flow VS Capital Growth



Awesome post. I love these ones where Jeff Brown goes into the numbers and compares scenarios. I always knew there was going to be good money involved with getting good at story problems when i was young in school. I didn’t know how, but i knew..

Written By: Jeff Brown AKA “Bawld Guy”

BawldGuy Axiom: To the extent the real estate investor pursues cash flow, they hinder capital growth. The converse is equally true.

Let’s construct an example to illustrate the principle.

At 42, you own your own home, but will be buying your first income property. Your plans are to retire at 62, if possible — giving you 20 years to get the job done. You have no problem going to 65 if it makes sense. You have a total of $200,000 for down payment(s) and closing costs to get you started. If you opt for bigger down payments and higher cash flow, using accumulated cash flow for future purchases, you’ll begin with two initial acquisitions.

Two properties at roughly 260,000 apiece, using 35% down plus closing costs will take about $190,000 or so. The cash flow generated will total approximately $14,300 annually. It’ll take ya 6 years 8 months to accumulate enough for your next purchase. That’s IF interest rates haven’t risen too much, and IF there’s been no real increase in values. If either one of those is true, much less both, your plan hits a significant roadblock.

Let’s pause here and see how the capital growth approach plays out, using the same initial capital.

Using 20% down on one, and 25% on two more, he’ll begin with three properties. His cash flow will exceed $15,000 a year, but we’ll use that figure here. Each month he’ll be applying $1,250 in cash flow directly to the principal pay down of one of the property loans — not all three. I’ve dubbed it the BawldGuy Domino Strategy. You knock ‘em down one at a time.

In 8.75 years, (105 months) the first property is debt free and now cash flowing at just over $1,500 monthly. We’ll round down to $1,500.

With the vastly increased cash flow the second property is completely paid of in the next 4.67 years, (56 months). Elapsed time: 13 years, 5 months. Let’s finish it off now.

The third and last property is then paid off in 3 years, 1 month. Total elapsed time: 16.5 years.

In the 3.5 years he has left before retirement, if he chooses to wait, his cash flow would add up to, give or take, a tad under $193,000. ($55,080/yr) Think he might be able to find a use for that cash about then, don’t you?

OR . . .

He opts for borrowing enough to buy a couple more duplexes at 25% down. That option leaves him with an annual cash flow of $50,500 AND 5 properties. He pays off the newly refinanced property in 33 months. This leaves him just 9 months short of his planned retirement. What to do?

I have a suggestion: Delay retirement if necessary by 20 months. At that point all 5 properties are now completely debt free and producing annual retirement income of a couple steak dinners short of $92,000 — a 67% increase.

What he did there, was decide it was worth 20 more months of working to increase his ultimate retirement income by over $3,000 a month. If he decides against that, his income would be $55,000 yearly, but he’d retire on the date planned.

Let’s revisit the alternative strategy of using cash flow to buy more property.

Though a silly, and frankly, a dangerous assumption, prices remaining static for nearly 7 years — this strategy does just that. It’s no less silly than assuming prices will do anything, as his crystal ball is as cracked as the rest of ours, right? Right.

Anywho . . .

He buys his third property, which closes at the end of his seventh year. His first 2 properties now sport loan balances of about $149,400 apiece — almost $300,000 PLUS the new property’s loan of $165,000. Cash flow remains static. He owes $465,000.

He buys another property about 5 years later. Elapsed time: 12 years. He buys his 5th property at about the 16 year point. Let’s review where he’d find himself at 20 years, his intended retirement date.

He’d own 5 properties, though each one would be relatively heavily encumbered. Let’s me specific, shall we?

The initial two purchases are still sportin’ loans with balances of roughly $87,000 each.

The third property’s loan has a remaining balance of just under $123,000 at the targeted retirement date.

The fourth property’s loan still has about $146,000 left.

The fifth one has barely been dented, with a remaining balance of $155,000 or so.

Income at his scheduled retirement date using this strategy would be $37,000 annually, give or take a weekend getaway. I’m underwhelmed. You?

He’d still owe almost $600,000 before he’d have the same income had he used the more efficient capital growth strategy.

Go over these numbers a few times. Get comfortable with ‘em. Make your own charts or columns for comparisons in order to really get a clear picture of what they mean in real life.

BawldGuy Takeaway

In order to increase cash flow initially the real estate investor is forced to put more capital into each investment. The more down he puts, the less property he, or she, can buy. Over time this results in a somewhat nasty surprise — a sorta good news/bad news joke — only not funny.

The good news? Ha! Ha! You bought the same 5 properties as you would’ve doing it my way.

The bad news? When retirement time arrives, your choices are not too cool no matter how ya spin ‘em. Either retire at just over $3,000 a month till ya pay off another $600,000 in debt — which will take a truly long time.


Delay your retirement by about the extra decade or so it’ll take to finish payin’ all that debt off. In simple terms, you can wait till your 70-72 to retire, or exist on $3,000 monthly till the $600,000 pays itself off — and that will be MUCH longer than a decade.

Beginning to see what I mean, Verne?

Look, this is nothing compared to what I could come up with, given enough time to get more deeply into the analysis. In fact, I’m fairly certain I could come up with a scenario with better results on the capital growth side of the comparison. But not so much on the cash flow approach. The whole “Save the cash flow and buy more property” comes from Grandpa.

Didn’t work real well for him, either. Just sayin’.


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