Cash Flow / Cash On Cash

13 Replies

I check both, here's the short and simple. If you put in $100 into a deal and it it has a 20% CoC that sound great, but that would only be $20. but for owning a property and only make $20 after everything is calculated - was that $20 really worth your time - even if you put in only 4hrs that month - that's equivalent to make $5/hr.

I look for 8%+ CoC. And at least $200 on a single family, $100 per door on a multi family and those two combined will usually set the low end for me. (I think I got this from Brandon Turner). Now I have made offers on properties that were 6% but cash flowed $225 per door on a multi-family just because I am in the early stages of my investing and I like the cash flow numbers.

@Nathan Zierer Thank you for the reply. You're first person I've seen from MO so far on here.

I'm just starting and I'm ready to purchase my 1st property and I'm really trying to understand how to calculate the cash flow and the cash on cash return. The cash on cash return I hear Brandon talk about in the podcasts , but so far I just can't wrap my head around it.

How would it work if I bought a property for 80k and put 20k in it for repairs and now it's worth 140k?

Good to see other Missourians in here.  

Well, if you are looking at 80k purchase and 20k repair with an after repair value (ARV) of 140k - that is flipping a house not renting. So cashflow doesn't matter there, but CoC does. If you have rent after the renovation then you are either looking a property that you have some good equity in or the potential of a BRRRR (Buy, Rehab, Rent, Refinance, Repeat). There are a lot of podcasts about BRRRR method. I would step into and listen to the Rookie Podcast, they have a lot of great tips on getting started and the early episodes of the BP Real-estate Podcast. They have them on this website or I like watching them on YouTube - seems like I pick up more when I see who is talking. Also I would look up Brandon's short video on the 4 Square Method for analyzing rental properties. This give a nice break down to what all the calculators out there do in a simple version.

4 Square Method

@Nathan Zierer I guess that is where I'm lost then. I've listen to bunch of podcasts using the BRRRR strategy. I guess I've been trying to run that method for flips and rentals which is probably why I'm struggling dialing all this in. I'm not sure how to tell if it should be rented or flipped. The main thing I've been doing is with the calculators deciding after the refinance if it will cash flow and if it just breaks even then I should use it as a flip.

Both.  Cash flow tells me if the property is worth carrying, and the cash flow in the first year tells me how fast I will get my initial investment (cash) back.  Notice I said, "...in the first year".  CoCR is a calculation that applies ONLY to the first year.  Cash flow is a number that occurs every year.

Those two metrics are inverse. I can increase my cash flow by putting more cash into the deal, but I reduce my cash on cash return. 

Also be aware that what expenses you include in your numbers will greatly affect the results. New investors often consider cash flow to be Rent - Payment. This doesn't account for all other expenses so it distorts our cash flow and CoC number.

As far as factors in making a decision, there are many other factors to consider like ARV, appreciation, taxes, condition, location, overall goals and time required to manage.

The decision to rent versus flipping it is a choice between investing (renting) and working a job (flipping). Flipping will return more cash quickly, but you lose the asset and the long term annuity of cash flow. When you rent a property, you still have the profit when you sell.

When people choose to flip, there are three main reasons:

1. They need the cash to live on today.

2. They need the cash to fund investments.

3. The asset is better suited for sale than renting.

There is no one number that matters most. Identify your goals and look at many factors. 

@Joe Splitrock Very good info. Thank you sir! 1 issue I'm coming across is rent pretty much stays around 600-800 in this area... homes in bad shape and ones in good shape. $1000 rented ppl just don't pay here very much which makes 100k+ homes almost have to be a flip best I can tell.

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