Real Estate Deal Analysis & Advice

The Top 2 Metrics You Need to Know in Any Real Estate Investing Deal

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When considering real estate deals, I care about two different metrics more than anything:

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  1. Cash-on-cash return
  2. Total cash flow

So, those two things I care about more than almost anything else, right. Which makes sense. Cash-on-cash return is what percentage of my investment am I making back every single year in profit from the cash flow? And cash flow is like a dollar amount: How much per month am I actually making?

Related: Introduction to Real Estate Investment Deal Analysis

Related: 6 Metrics You Must Know to Identify Great Investments

What’s a Good Cash-on-Cash Return? What’s Good Cash Flow?

Now, I oftentimes say that for cash-and-cash return, I aim for 10-12%. That’s what I want for cash-and-cash return. And I aim for between $100-200 a month in cash flow per unit.

A question I got recently on a webinar was: What if the actual dollar amount looked pretty good—$200 on a single-family house—but it was only getting a 5% return… would I do that? Great question.

So, here's how I look at that. If I'm just getting started, trying to buy my very first deal, and only getting a 5% return—if I know that I would have more money where that came from—I would probably do it just to start building momentum. That's so long as I was really confident in that 5% number. Because I believe that in the beginning, momentum is more important than your actual return on a single investment—the knowledge and experience you gain are invaluable.

However, that said, I would normally say the cash-and-cash return number—the percentage—is more important than your dollar amount. Why am I even looking at two numbers to being with? That’s because without using both those metrics, you can manipulate it.


Related: A Guide to Internal Rate of Return & Other Must-Know Financial Metrics

Beware of Manipulating Metrics

For example, what if I had a property that was making me $200 per month? It fits my metric, right? But say it cost me $10 million to buy that property. That would be a horrible deal! It would be a super low—like a 0.0001%—cash-on-cash return.

Now, on the other hand, what if I had a property that was giving me a 50% return on investment? Whoa, that's really good! But that just might mean I put $2 into the deal because it was almost a no-money-down deal. And I made back only $1 the entire year. I was making back like $0.08 a month. That's a horrible deal, right?

That’s why I want both these things now. Generally speaking, I care more about my percentage return than I do my cash-flow number; however, I would like to have both those hit my metrics. But again, I would be willing—on an early deal, just to build momentum—to go a little bit lower than that.

I hope that helps!

Questions? Comments? 

Join the discussion below!

Brandon Turner is an active real estate investor, entrepreneur, writer, and co-host of the BiggerPockets Podcast. He is a nationally recognized leader in the real estate education space and has tau...
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    Thomas J. Clifford from Gainesville, FL
    Replied about 1 month ago
    Cool post, thanks! Is there a way to use those two metrics as data points to tell you what your Minimum Purchase Price should be? I haven't been able to make up an equation on my own, and cant seem to find a good resource on how to find that. Basically trying to find that magic number you always talk about that will make a property a "good deal." Just curious if anyone had that insight. Thanks all at BP - Be safe and be well T.
    David Oechslein Rental Property Investor from Washington, DC
    Replied about 1 month ago
    Thomas, there isn't a specific equation to find the "magic" number. What Brandon is demonstrating is that you should use a property analysis calculator of your choosing (could be the BP calculators or just a regular spreadsheet you create) to run all the income and expenses on a property. Start by using the listed asking price and see what CoC ROI and cashflow it gives you. If it isn't what you are looking for, keep lowering the asking price until the numbers hit your CoC ROI and cashflow standards. That number is the magic number.
    Dewayne Stiers Investor from St. Charles, MO 63301
    Replied about 1 month ago
    Thomas. I’ve always said that 1 thing determines the price of the property. That one thing is rent that it will actually bring. Rent in virtually every area takes in the consideration the condition of the property, the school systems. what the general area is like and will tell you what your cash flow is going to look like. Most of the spreadsheets today if I’m a long ways from the day that they would add in tax benefits and inflation of the property, but those items are just a benefit of owning property and you can’t spend them
    Todd Burns
    Replied about 1 month ago
    Dewayne....excellent point, very true for any market and property. Cash-on-cash can also be manipulated by the loan terms for that particular deal. For example, in our business, every loan is commercial (25% down) and set up for either 15yr or 20yr amortization. Under those terms, we regularly see 5%-7% cash-on-cash returns and cash flows of $200-$300 per month. If we put 20% down (instead of 25%) the cash-on-cash return would increase but the cash flow would decrease. Point is, if the lender offers flexibility, there may be an opportunity to adjust the loan terms while still providing solid cash flow. This is an example of another variable in the equation that may be able to be fine tuned to meet your investment criteria.
    Taylor Webb
    Replied about 1 month ago
    When evaluating a deal based on these metrics, how do you balance current value with potential future value? E.g. I just ended negotiations on a property that was way over priced based on market comps and current rents; it would have a negative cash flow until current leases end. However, I know that even paying the inflated cost, I could have added several bedrooms to appreciate the property value, get a 15% CoC, and about $400/mo/unit cash flow. Is it worth paying over market value in this situation (in this case about 8%) in order to end up with good returns?
    Rob Lansu
    Replied about 1 month ago
    In one of the earlier podcasts I heard an investor say "value as is" (sorry, I don't remember who it was or what episode). If you buy the property and manage to increase the value (increasing the rent, adding bedrooms, etc) that value increase is yours and not the sellers! If the seller wants that increase let them do the work.