Why so much emphasis on Cash on Cash return?
Member since 2018 · 11 posts · 12 votes
Why so much emphasis on Cash on Cash return?
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Investor · North Richland Hills, TX · Member since 2013 · 1k+ posts · 1k+ votes
8yCash flow pays bills. You can live on it if you have big enough portfolio. Equity does not pay bills unless you sell or refinance. In which case it's a one time event and no future income.
Let's suppose you have no other income. Would you rather have $100K/year cash flow and no equity growth or $100K/year equity growth and no cash flow?
35 Replies
- Member since 2018 · 11 posts · 12 votes8y
Ok, I get it. You want money that you can use. You can use your cash flow. You don't have immediate access to your equity. And the reason why Cash on cash matters instead of just the flat cash flow is because you usually need money to make money, so if you have X dollars that can be invested, you get the maximum cash flow possible by going for properties with a high cash on cash return.
A property that gets $300 monthly cash flow but requires you to have $12,000 invested may not be as good of a deal as a property that gets $200 monthly cash flow but only requires $6,000 invested because it leaves you with an extra $6,000 that can be used to invest into another property for more cash flow.Thank you for all the replies and helping me understand this.
- Investor / Broker · Brooklyn, NY · Member since 2016 · 665 posts · 1k+ votes8y
I have been investing in Brooklyn, NYC for 21 years.
In the year 2000, I bought a 2 family for $140k with a Down Payment and Closing costs totaling $28k.
The Rents and Expenses broke even but I lived for free.
The CoC Return was 0%.
Fast forward to today, the rents for the 2 apts increased from $500 per month each to almost $2,000 per month after 18 years.
Because I used a fixed rate mortgage at the time, my monthly expenses increased MUCH less than the Rents did, raising my cash flow.
Today, that property would have cashed flowed around $2.5k per month or $30k per year.
If I used CoC Return as a metric 18 years later, my CoC Return would be $30k / $28k Initial Investment or 107%.
In markets like Brooklyn, NYC, what matters isn't the Current CoC Return, but the FUTURE CoC Return.
This is EXACTLY why I use Internal Rates of Return (IRR).
You cannot understand the Return on the Investments in Markets like Brooklyn with simple CoC Return Calculation.
Instead, you need to understand the CoC Return GROWTH.
Certainly not by coincidence, btw, the value of the property went up from $140k in 2000 to a current market value of over $1 Million.
If you want to understand the IRR from real examples, you should read my past posts. I even demo'd it via some spreadsheets I put together and posted a snapshot on how you should put together your assumptions which are needed in the IRR Calculation.
Anyone who thinks Equity is not real should also reconsider that.
I have pulled out millions of dollars against my Properties throughout the years from the Equity. The Banks thinks it's real, why don't you?
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes8y
Originally posted by @Llewelyn A.:
Anyone who thinks Equity is not real should also reconsider that.
I have pulled out millions of dollars against my Properties throughout the years from the Equity. The Banks thinks it's real, why don't you?
I will never understand why some investors count monthly cash flows differently than cash flows at origination or refinance. They are all cash flows. It's like little cash flows count but the big ones do not. Many investors get 5-10 years of (monthly) cash flows with a refinance (or sale). It's why many investors only invest in value add real estate.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Mike Dymski:
Originally posted by @Llewelyn A.:
Anyone who thinks Equity is not real should also reconsider that.
I have pulled out millions of dollars against my Properties throughout the years from the Equity. The Banks thinks it's real, why don't you?
I will never understand why some investors count monthly cash flows differently than cash flows at origination or refinance. They are all cash flows. It's like little cash flows count but the big ones do not. Many investors get 5-10 years of (monthly) cash flows with a refinance (or sale). It's why many investors only invest in value add real estate.
could it be maybe that on refi proceeds the investor at some point has to pay it back.. ?? but I get your point there are many ways to cash flow in real estate other than basic rental income.
- Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes8y@Llewelyn A. @Mike Dymski Refinancing equity and cash flow are not the same. Refinancing equity has to be paid back, with interest. It's not free and clear, as cashflow is. Cash flow can be compared to stock dividends, whereas equity is stock price increase. You only truly realize the profit from appreciation when you sell.
- Investor / Broker · Brooklyn, NY · Member since 2016 · 665 posts · 1k+ votes8y
EXACTLY!! "You Only Realize the Profit from appreciation when you sell" IS A FANTASTIC Advantage for the really knowledgeable Investor!
It's such a great advantage to be able to take money out through an Equity Loan rather than realize profits and having to pay a tax on it (that is assuming you don't do a 1031 Exchange).
So imagine you took out an equity loan, added more to your investments, not paying taxes because you didn't sell to realize the profit as you don't need to pay taxes to take out money from your investment, then also get a tax deduction for the loan against the new investment that you just bought! INCREDIBLE!
When you do it this way, you supercharge your portfolio!
Great Point and one of the reasons why I have achieved incredible returns!
Getting back on topic about the CoC Return though....
Another issue with the CoC Return that some people use to pull the trigger is that they don't take into account future Capital Expenditures as well as future cash flow growth.
An example why this is bad is that let us say you are buying a property with some structural damage really cheap that you must fix in 5 years.
You calculated your CoC Return for the purchase and it GREAT!!! wow! 15%!!!!
But wait a minute...... you completely ignored that $100k structural damage fix.
Goodbye CoC Return calculated for the day of the purchase!!
The practice of using a single calculation based on TODAY's Purchase information is setting yourself up for a world of hurt if you don't get lucky enough that the property maintains it's cash flow and capital expenditures through the holding period.
When it comes to the IRR, you project it out for 10 years and you include every single known and potentially unknown cash flows including the anticipated fix for the structural damage.
Why would you do it any different?
- Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes8y
Originally posted by @Jason D.:
@Llewelyn A. @Mike Dymski Refinancing equity and cash flow are not the same. Refinancing equity has to be paid back, with interest. It's not free and clear, as cashflow is. Cash flow can be compared to stock dividends, whereas equity is stock price increase. You only truly realize the profit from appreciation when you sell.I'll agree definitionaly with you; free cash flow and refi processed aren't the same thing.
If you analyze deals like Mike and Llewelyn do, with some sort of net present value calculation ( IRR in this case), then cash flow from a refi and free cash flow are de facto the same thing. The refi allows you to take out equity now while forgoing future cash flows until the debt is retired. The IRR calculation is powerful enough to let you to compare both options under a fixed set of criteria and see which gives you the best return.
Will it always make sense to refi? No, sometimes as you pointed out, the interest expense eats up the gains from the time value of money savings. Other times it doesn't. Other still other times it makes sense to refi and IRR tells you to do so, but you use more qualitative data (like the fact you know the factory down the street is closing) to make a decision.
All these calculations allow investors to make decisions, they don't make decisions for investors. Losings sight of that can cost lots of money.
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes8y
Originally posted by @Jason D.:
@Llewelyn A. @Mike Dymski Refinancing equity and cash flow are not the same. Refinancing equity has to be paid back, with interest. It's not free and clear, as cashflow is. Cash flow can be compared to stock dividends, whereas equity is stock price increase. You only truly realize the profit from appreciation when you sell.Hey Jason. I see your posts often and enjoy them.
Positive monthly cash flow is not free and clear if the property still has a mortgage. It's just based on how we choose to structure and then pay down the debt.
A loan loan payment is a cash outflow.
A loan advance is a cash inflow (for the same reasons).
A refinance and getting a loan at origination are both are cash inflows. We are choosing cash flow now over cash flow in the future...because our analysis shows that we can generate more cash flow than the cost of borrowing.
I value monthly cash flow tremendously because my strategy involves living off of it but the big profit center in real estate is adding value (and then tapping into it).
- Rental Property Investor · Concord, NC · Member since 2016 · 1k+ posts · 3k+ votes8y
NPV, IRR, ROI, ROE, COC, etc. I can understand'em when I google'em; then I forget ten minutes later. I follow the @Steve Vaughan school of thought. Cardone and Kiyosaki may not like my geese, but they cash flow my lifestyle and I've watched soccer in the morning and napped in the afternoon for the last couple weeks. I guess my financial acronym is POLF (Pay'em Off and Love Life).
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes8y
Originally posted by @Terrell Garren:
NPV, IRR, ROI, ROE, COC, etc. I can understand'em when I google'em; then I forget ten minutes later. I follow the @Steve Vaughan school of thought. Cardone and Kiyosaki may not like my geese, but they cash flow my lifestyle and I've watched soccer in the morning and napped in the afternoon for the last couple weeks. I guess my financial acronym is POLF (Pay'em Off and Love Life).
Ooh, a new acronym! Mind if I try?
PONAW - Pay 'em Off, Nap At Will ;)
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