1% Cap Rate or Cash on Cash?

Question

What metric do you prefer when first analyzing a property? 1%, cap rate, cash on cash, etc. What do you think is the most useful? I'm looking at 2 fam in Tampa as my first investment in my new area.. probably will hold for 5-10 years. Not one of them comes close to the 1% rule unless the price comes down 50k+.. but some of the other metrics make a bit more sense when you tweak them only a little.

Also, what's your go to number for cash flow per door? Some say $200 I'd their number, others won't even bother unless it's over $500.

Jeremy Kloter · Answer

If leveraged cash on cash should be a big factor. We typically go off of this when taking down flips and rentals. Although you want to look at other metrics its a great place to start. The 1% rule hasn't really existed in our local market in a long time. Cash flow per door depends on the investor and price point. If it is your first deal or so, just get into the game to start. We've had the benefit of rising rents and when rates decrease you can refi and increase the cash flow.

Stephen Dispensa · Answer

My advice to investors is to first look at a property from 30,000 feet and analyze the 4 areas where you make a return from real estate investing:

1. Appreciation

2. Cash flow

3. Debt paydown

4. Tax  Benefits

Calculate all 4 and understand the actual ROI of a property. Immediately you'll see there are more investments out there that are worthwhile than you thought. However, you need to tame those four quadrants to individual situations to make deals work. If you're in a higher tax bracket the depreciation expense may save you a TON of money, however if the cash flow isn't there financing may be difficult. When comparing two properties, one may cash flow great, but another may be in a neighborhood with rapidly appreciation values and skyrocketing rents. You're opportunity to increase both appreciation and cash flow would be huge and tip the scales towards investing in the property with less initial cashflow.

Shawn Winters · Answer

John,

Of course, this is one of those questions where every answer is going to be different, based on risk tolerance and management style.  Broadly speaking for myself, I consider net cash flow to be the most important metric.   Second, debt income ratio, because I need that for funding.

An asset with a strong cash flow should be able to whether most investor mistakes and, or economic downturns.  And a healthy cash flow is going to improve the other metrics.

Joe Villeneuve · Answer

It has to match what the financial criteria is at that time on my plan.

What it will come down to as a metric, is how fast I recover my cost (cash).  It must be within 3 - 5 years.

Russell Brazil · Answer

IRR, Internal Rate of Return

1% Cap Rate or Cash on Cash?

Most Popular Reply