Cash Flow V Cash on Cash Return
Kenneth GarrettPro Member
Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votesThere 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?
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.
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.
Thanks for the reply. That equity over time is definitely stale/stagnant. You have to balance pulling some of that equity to redeploying it to keep that return increasing. It’s a negative event to let it sit.
I had bought a property back in 2016 and it had tripled in value over those 10 years. I redeployed that equity into a great return.
The cash on equity (COE) is a great tool to use.
Thanks for the reply. That equity over time is definitely stale/stagnant. You have to balance pulling some of that equity to redeploying it to keep that return increasing. It’s a negative event to let it sit.
I had bought a property back in 2016 and it had tripled in value over those 10 years. I redeployed that equity into a great return.
The cash on equity (COE) is a great tool to use.
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?
@Kenneth Garrett, good framing and Joe's point on cumulative cash flow recovery is the right way to think about it over a hold period.
The metric that ties all of this together cleanly across time is IRR. Cash flow tells you monthly. Cash-on-cash tells you year one return on invested capital. But neither of them accounts for the time value of money or what happens when you refinance, pull equity, or sell. IRR captures all of them in one number because it weights when the cash comes back to you, not just how much.
A deal that cash flows $500/m for 10 years and exits at a $200K gain has a very different IRR than one that cash flows $200/m but lets you pull all your capital out in year two through a refi and redeploy it. The second deal often wins on IRR even though it looks weaker on a monthly cash flow basis.
That is why BRRRR investors who recycle capital fast tend to build wealth faster than buy and hold investors sitting on stagnant equity, exactly the point you and Joe are making, just expressed through the IRR lens.
100%.
Those who rely on CoC or Cash Flow metrics don't really understand investing fundamentals and just using shortcut rules of thumb.
People can succeed with that approach, but are only looking at half the picture and making less informed decisions.
Good post that lays out an important distinction.
It’s always interesting to me how investors perceive things differently.
You use the words “stuck in” when referring to cash invested in a property. I understand the concept you express.
I’d like to present a different spin on this.
For me, my cash invested in a property is not “stuck in”.
To me, I see those dollars as putting on their suit and tie or tool belt every day and going to work for me earning income for me 24/7. I’m happy to see those dollars go to work for me.
Just a different perspective.
Good framing Kenneth. The cash flow per door number gets thrown around as the benchmark when really it's just part of the picture. What your capital is actually doing is the question.
I'd add one more layer: the metric changes depending on the stage of the deal. When you're evaluating whether to buy, CoC (or IRR if you want to get precise like Masoud mentioned) tells you what your money will earn. Once you own it for a few years, the question shifts to whether that equity is still earning at the same rate or if it's become dead weight sitting in an appreciating asset. That's when the "should I refi or sell" conversation starts making real sense.
In high-appreciation markets especially, the cash flow number is almost always smaller, but the equity compounding story is what actually builds wealth. The investors who get in trouble are the ones chasing the $500/door number in a flat market and ignoring total return. The ones who thrive usually understand all the levers, not just the monthly check.