Cashflow or Cash on Cash Return?

37 Replies

Originally posted by @Jonathan Edmund :

I am looking at buying a property in my market. It's just an efficiency condo and it's currently rented for $700 a month. Tenant in place through May 2021. I ran my calculations on it and if I purchase it and put 20% down, I'm looking at a $167 a month cashflow after factoring in taxes, mortgage, HOA fee and costs that vary. But my cash on cash return will be 19%.

If I pay cash for the unit, I can cashflor $329 a month but my cash on cash return is only 8.5%. Since rates are so low right now, would it make more sense to finance it and keep my cash so I can try to get another unit sooner, or is there a good reason why going cash makes more sense in this case?

 This is personal finance 101 and only you know your risk tolerance.  Sounds like a good deal and there is no right answer.  

Factor time value of money, leverage wins out all day long.

Do you need low stress to sleep well at night.  Low/no leverage = piece of mind.  Lower returns, but greater safety. 

Every decision is based on risk adjusted return.  Much of this formula requires your own risk tolerance as a variable. 

Originally posted by @Joe Villeneuve :
Originally posted by @Jonathan Edmund :
yea I was just looking for opinion here. The amount of cashflow isn’t as important to me as how quickly I recoup the cash so I can keep purchasing. I was just really looking for people’s opinions regarding their preference because I hear some people say always buy cash but I look at financing as paying little cash and having a tenant pay the rest. You just don’t cashflow as much up front but can buy more units to offset that reduction. Am I wrong in that thinking? 

Originally posted by @Andrew Frowiss:

@Jonathan Edmund I have to agree with @Joe Villeneuve in his reply. I would side on putting down %20 and using your funds on getting your next deal. Having cash allows you to do other things like finance flips for other investors. If you have money after you can use it on your next deal, or partner with other investors. It all depends on what your investing goals are. I don't try and get rich off 1 deal, and instead am always looking for the next one as this wont be my last.

 

Part right, and part not so right.

When you put down 100%, you are getting $329/month in CF, but it takes a lot longer to make a profit since you have to recover all of your cost (which is just your cash), before profits are made.

When you only put down 20%, your cash flow may only be $167.month for that same unit, however, if you started with the same amount of cash in both cases, you could buy 5 of the same property...at $167/month each, so your CF total, on using the same starting cash as the 100% cash option, would be 5 x  $167/month = $835/month.  Now, which one has the better CF, which one costs you less, and which one allows you to start to profit faster?  The answers for all three are the same.

 

Well explained Joe. A fundamental tenant of RE investing that many people don't understand. 

 

Originally posted by @Matthew McNeil :
Originally posted by @Joe Villeneuve:
Originally posted by @Jonathan Edmund :
yea I was just looking for opinion here. The amount of cashflow isn’t as important to me as how quickly I recoup the cash so I can keep purchasing. I was just really looking for people’s opinions regarding their preference because I hear some people say always buy cash but I look at financing as paying little cash and having a tenant pay the rest. You just don’t cashflow as much up front but can buy more units to offset that reduction. Am I wrong in that thinking? 

Originally posted by @Andrew Frowiss:

@Jonathan Edmund I have to agree with @Joe Villeneuve in his reply. I would side on putting down %20 and using your funds on getting your next deal. Having cash allows you to do other things like finance flips for other investors. If you have money after you can use it on your next deal, or partner with other investors. It all depends on what your investing goals are. I don't try and get rich off 1 deal, and instead am always looking for the next one as this wont be my last.

 

Part right, and part not so right.

When you put down 100%, you are getting $329/month in CF, but it takes a lot longer to make a profit since you have to recover all of your cost (which is just your cash), before profits are made.

When you only put down 20%, your cash flow may only be $167.month for that same unit, however, if you started with the same amount of cash in both cases, you could buy 5 of the same property...at $167/month each, so your CF total, on using the same starting cash as the 100% cash option, would be 5 x  $167/month = $835/month.  Now, which one has the better CF, which one costs you less, and which one allows you to start to profit faster?  The answers for all three are the same.

 

Well explained Joe. A fundamental tenant of RE investing that many people don't understand. 

 

Thank you.

 

As has been stated multiple times I look as CoC ROI on a deal like this more heavily than cash flow. Do you want that money "tied up" four years in a cash purchase?

You take away the ability to recoup your investment quickly when you pay cash on a deal like that BUT if you want to keep it 20-30 years then yeah if you can afford it then cash is a viable option. If you want to continue to invest and build your portfolio then finance away!

Here, the fees incurred with the mortgage may represent a sizeable portion of the value of the asset. I think you need to calculate how long it will take to recoup these fees versus buying cash. If you are confident you will hold it longer, go for financing.

@Joe Villeneuve

Great simple way to describe how to invest.

I always look at how quickly I can get my cash back and become what may be called “infinite” in that deal. The way I sometimes do it many may disagree with but I want a return and my cash back as soon as possible.

Cash flow will always be higher without a loan whereas cash on cash return will usually (but not always) be higher with one. I generally lean toward using leverage. But it's riskier to do so and I think that's the way to think of it. Not so much cash flow vs cash on cash return but higher cash on cash return with more risk vs lower cash on cash return with less risk.

You always get richer by leveraging OPM (other ppl's money) at rates lower than you can get a return at. With current interest rates, I would def do 20% down

As Joe mentioned to answer your question, its not an either or scenario with these two different metrics, but I think you're not looking broadly enough and maximizing your returns should be the focus.

What strategy will get you the best returns (cash flow, equity paydown, appreciation) for the capital invested. If you are solely looking at cash flow % or CoC to determine what to buy, you will possibly be missing out on better opportunities

Originally posted by @Christopher Dean :

@Joe Villeneuve

Great simple way to describe how to invest.

I always look at how quickly I can get my cash back and become what may be called “infinite” in that deal. The way I sometimes do it many may disagree with but I want a return and my cash back as soon as possible.

The answer to "how quickly" should be: 6 months or a year, right?  

ie. Using the BRRRR model, you might owe 100% of what you paid for it after the "Refi", but, you still cash flow positively (it doesn't have to be a lot, because your Tenants pay your whole mortgage, and you have zero of your own dollars left in the deal), because you only go for great deals in the first place, right?  Cheers...