Can anyone tell me what the metric is called to explain cash flow per month as a percentage of purchase price? I think it would be a useful tool for investors to go by, rather than saying "this property passes the 2% test," there should be a name for this like the (fill in the blank) rate. I know cap rate is on an annualized basis but i have never heard of a term that tells investors cash flow as a percentage of purchase price. Does such a term exist?
I use cash on cash, the percent earned based on how much I put in the home. It lets me look at my returns based on my down payments since I am a leverage lover ;)
I did some research and found the term is called rent to purchase ratio.
@Aaron Schwartz Did you just answer your own question? Yes, "2%" means receiving a gross rent of 2% of the purchase price, per month. Depending on where you are looking to invest, that may be a completely unrealistic expectation, or elsewhere, a useful way of quickly gauging whether an asking price is in the right ball park.
So the "metric" of whether it should be 1%, 2%, or higher, or lower, for any particular area is largely to do with the other factors that indicate whether a property would be a wise investment:- Is the neighborhood A, B, C, or D? Is the property undervalued compared to what it should/will be worth? Are expenses (cap ex, taxes, vacancy expectation, property management etc) low enough? Lots to calculate! Cheers...
@Elizabeth Colegrove Cash on cash is an important metric to know but looking at factors such as the asset yield and NOI as a function of the asset value is still very important. Your higher your risk tolerance when it comes to leverage is rewarded by cash on cash, but the leverage works both ways. Looking at the investment without consideration of your financing method can't be replaced.
Free eBook from BiggerPockets!
Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!
- Actionable advice for getting started,
- Discover the 10 Most Lucrative Real Estate Niches,
- Learn how to get started with or without money,
- Explore Real-Life Strategies for Building Wealth,
- And a LOT more.
Sign up below to download the eBook for FREE today!
We hate spam just as much as you
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing