Cash Flow V Cash on Cash Return

[Kenneth Garrett]

There are many discussions about cash flow per door which is important.  It should never be negative in my opinion.  Don’t get me started on appreciation, that’s the bonus of investing over time.  The reality is there are better ways to evaluate it based on your return.

A $300,000 property that cash flows $700 a month is much different than a $400,000 property even though the cash flow is the same.  It depends on how much of your cash is in the deal.

If I have $60,000 stuck in (20% down) my cash on cash return is $700x12=$8,400.00 that is a 14% return.  A $400,000 at 20% down is $80,000 stuck in.  That’s a return of 10.5% (not counting closing costs or other cost, just trying to give the concept)

Even though it’s the same cash flow, the return is much different.    

I mostly invest in BRRRR deals so cash on cash return hopefully is infinite, but if I have some money stuck in, I try to get it returned quickly. I know there are other metrics to apply, but just trying to keep It simple here.

How are you assessing cash flow metrics?

[Joe Villeneuve]

There is a huge misconception about cash on cash return that has hung around for a long time. CoCR is not an ongoing number. It only measures the return of cash in relationship to the cash put in from the first year ONLY. Many REI like to improve their CoCR by calculating it as a running total throughout the years of ownership.

The ongoing cumulative CF from a deal in relationship to the cash put into the deal is critical though. "Cash in" represents the cost to the REI. It is the only cost. The mortgage is part of the expenses and it impacts the CF, but it isn't a cost to the REI since the tenant is paying it. The cumulative CF tells the REI how fast they recover their cost, which tells the REI how fast the REI gets to profit. The faster the better, so the lower the cost the better.

Your comparison between properties above is a great example of this.

Appreciation is the true profit though but be careful. As the property appreciates, the REI is actually losing money, not gaining it. Appreciation is free cash frozen in the property. IT has no use until it is "melted" into liquid cash. As it grows, it grows at the same increase in dollars as the PV does. Trouble is, when you bought the property, the relationship between cost (DP) and the PV, was at a 1 to 5 relationship. AS the equity/appreciation grows, it does on a 1 to 1 relationship, so it dilutes the value of that equity. In other words, that equity is buying less PV as it grows.

Get that equity liquid, and get it back to that 1 to 5 relationship, and watch your portfolio and profits grow exponentially.