Cashflow or Cash on Cash Return?
Jonathan EdmundPro Member
North Myrtle Beach, SC · Member since 2017 · 58 posts · 40 votesI 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?
You're using the wrong numbers to make your comparison. Trying to compare % to a $$$ number is like trying to compare apples to oranges. Aside from the fact percentages tell you nothing of value.
There is nothing to compare here. The two numbers you need to look at are not in conflict with eachother. The two numbers you need to use work together.
How much cash flow do you have, and how many years it will take you to recover your cash. The higher cash flow by paying all cash isn't a plus. By paying 100%, it will take you much longer to recover all the cash you spent, and that added cash flow you think you are getting is an illusion. When the tenant pays your mortgage, and you only have to come up with 20% of the money in cash, you can recover your cash much faster. That added cash flow you're getting, you are paying for.
I don't know the details but I'd guess cash is better in this case, because from the sound of it this is a low cost unit ($45k total?) that you may have trouble getting an individual mortgage on anyway. That would be the only reason though.
@Aaron K. if your 45k figure is even close my hat is off. Would you mind sharing how you arrived at that number from the post?
You're using the wrong numbers to make your comparison. Trying to compare % to a $$$ number is like trying to compare apples to oranges. Aside from the fact percentages tell you nothing of value.
There is nothing to compare here. The two numbers you need to look at are not in conflict with eachother. The two numbers you need to use work together.
How much cash flow do you have, and how many years it will take you to recover your cash. The higher cash flow by paying all cash isn't a plus. By paying 100%, it will take you much longer to recover all the cash you spent, and that added cash flow you think you are getting is an illusion. When the tenant pays your mortgage, and you only have to come up with 20% of the money in cash, you can recover your cash much faster. That added cash flow you're getting, you are paying for.
You're using the wrong numbers to make your comparison. Trying to compare % to a $$$ number is like trying to compare apples to oranges. Aside from the fact percentages tell you nothing of value.
There is nothing to compare here. The two numbers you need to look at are not in conflict with eachother. The two numbers you need to use work together.
How much cash flow do you have, and how many years it will take you to recover your cash. The higher cash flow by paying all cash isn't a plus. By paying 100%, it will take you much longer to recover all the cash you spent, and that added cash flow you think you are getting is an illusion. When the tenant pays your mortgage, and you only have to come up with 20% of the money in cash, you can recover your cash much faster. That added cash flow you're getting, you are paying for.
I agree 100%. If you can gain possession with only 20% down and still have positive cash flow, you will be able to recoup your investment much quicker with much less upfront capital.
You're using the wrong numbers to make your comparison. Trying to compare % to a $$$ number is like trying to compare apples to oranges. Aside from the fact percentages tell you nothing of value.
There is nothing to compare here. The two numbers you need to look at are not in conflict with eachother. The two numbers you need to use work together.
How much cash flow do you have, and how many years it will take you to recover your cash. The higher cash flow by paying all cash isn't a plus. By paying 100%, it will take you much longer to recover all the cash you spent, and that added cash flow you think you are getting is an illusion. When the tenant pays your mortgage, and you only have to come up with 20% of the money in cash, you can recover your cash much faster. That added cash flow you're getting, you are paying for.
I agree 100%. If you can gain possession with only 20% down and still have positive cash flow, you will be able to recoup your investment much quicker with much less upfront capital.
Too many investors focus on percentages instead of dollars, and they completely misunderstand the difference between "total cost" and the "Cost to the REI". They are NOT the same.
I don't know the details but I'd guess cash is better in this case, because from the sound of it this is a low cost unit ($45k total?) that you may have trouble getting an individual mortgage on anyway. That would be the only reason though.
@Bjorn Ahlblad I just took the difference between cash flow numbers and attributed a value to a mortgage spread out over 30 years.
@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.
You're using the wrong numbers to make your comparison. Trying to compare % to a $$$ number is like trying to compare apples to oranges. Aside from the fact percentages tell you nothing of value.
There is nothing to compare here. The two numbers you need to look at are not in conflict with eachother. The two numbers you need to use work together.
How much cash flow do you have, and how many years it will take you to recover your cash. The higher cash flow by paying all cash isn't a plus. By paying 100%, it will take you much longer to recover all the cash you spent, and that added cash flow you think you are getting is an illusion. When the tenant pays your mortgage, and you only have to come up with 20% of the money in cash, you can recover your cash much faster. That added cash flow you're getting, you are paying for.
I agree 100%. If you can gain possession with only 20% down and still have positive cash flow, you will be able to recoup your investment much quicker with much less upfront capital.
Too many investors focus on percentages instead of dollars, and they completely misunderstand the difference between "total cost" and the "Cost to the REI". They are NOT the same.
@Jonathan Edmund I have to agree with @Joe Villeneuve in his reply. I would side on putting down %20 and using your funds on getting your next deal. Having cash allows you to do other things like finance flips for other investors. If you have money after you can use it on your next deal, or partner with other investors. It all depends on what your investing goals are. I don't try and get rich off 1 deal, and instead am always looking for the next one as this wont be my last.
You're using the wrong numbers to make your comparison. Trying to compare % to a $$$ number is like trying to compare apples to oranges. Aside from the fact percentages tell you nothing of value.
There is nothing to compare here. The two numbers you need to look at are not in conflict with eachother. The two numbers you need to use work together.
How much cash flow do you have, and how many years it will take you to recover your cash. The higher cash flow by paying all cash isn't a plus. By paying 100%, it will take you much longer to recover all the cash you spent, and that added cash flow you think you are getting is an illusion. When the tenant pays your mortgage, and you only have to come up with 20% of the money in cash, you can recover your cash much faster. That added cash flow you're getting, you are paying for.
I agree 100%. If you can gain possession with only 20% down and still have positive cash flow, you will be able to recoup your investment much quicker with much less upfront capital.
Too many investors focus on percentages instead of dollars, and they completely misunderstand the difference between "total cost" and the "Cost to the REI". They are NOT the same.
The answers for both are the same...for the same reasons.
@Bjorn Ahlblad I just took the difference between cash flow numbers and attributed a value to a mortgage spread out over 30 years.
I kinda thought about that but did not follow through. Thank you.
@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.
You're using the wrong numbers to make your comparison. Trying to compare % to a $$$ number is like trying to compare apples to oranges. Aside from the fact percentages tell you nothing of value.
There is nothing to compare here. The two numbers you need to look at are not in conflict with eachother. The two numbers you need to use work together.
How much cash flow do you have, and how many years it will take you to recover your cash. The higher cash flow by paying all cash isn't a plus. By paying 100%, it will take you much longer to recover all the cash you spent, and that added cash flow you think you are getting is an illusion. When the tenant pays your mortgage, and you only have to come up with 20% of the money in cash, you can recover your cash much faster. That added cash flow you're getting, you are paying for.
I agree 100%. If you can gain possession with only 20% down and still have positive cash flow, you will be able to recoup your investment much quicker with much less upfront capital.
Too many investors focus on percentages instead of dollars, and they completely misunderstand the difference between "total cost" and the "Cost to the REI". They are NOT the same.
Yes, the % can be converted, but until it is, the % tells you nothing. If it did, you wouldn't be asking which one is better...would you?
@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.
@Jonathan Edmund pf course your cash flow would be smaller when you put 1/5 of the money compared to buying cash. The logic is that instead of buying one unit cash you can buy 5 units with 20% down, then you invested the same amount but make a MUCH higher cash flow
Leverage your money, especially with favorable lender terms, and use the rest to invest in further units/properties. Your returns get better as time progresses. May not look like much immediately.
If you aren't factoring in a honest and real holdback for capex/vacancy/repairs, and calculating CoC ROI after that deduction, you're kidding yourself.
That said: CoC ROI, within reason. 25% COC ROI but making $25 cashflow, I dunno.
If I can make same or greater with an easy index fund, why would I buy RE? You need CoC ROI to tell you your investment is superior to a Vanguard fund, etc.
@Jonathan Edmund
Cash on cash isn’t super important to me as a buy and hold investor because it only measures a single snapshot in time : generally the 1st stabilized year of ownership.
It does not account for rent growth over time or appreciation, which for me have been far more powerful wealth builders than the return in the first year of ownership.
Leverage whenever you can. I wouldn't pay cash, but use it to leverage more properties.
@Joe Villeneuve yes! I have a buddy that wants get into rentals and he keeps wanting to buy a place outright. I keep telling him then your cash is all tied up but a down payment and CoC is better and let's you keep looking for other deals. Now I will say, IMO, having a larger equity stake (larger downpayment) in this market is not a bad idea. Even in any market if I could put 30-35% down I would, but cap rate has to be right to recoup investment.
@Joe Villeneuve yes! I have a buddy that wants get into rentals and he keeps wanting to buy a place outright. I keep telling him then your cash is all tied up but a down payment and CoC is better and let's you keep looking for other deals. Now I will say, IMO, having a larger equity stake (larger downpayment) in this market is not a bad idea. Even in any market if I could put 30-35% down I would, but cap rate has to be right to recoup investment.
...and you would be losing money. Buying equity isn't gaining you anything. All you're doing is moving your cash from your bank, where it is liquid and filled with potential for buying something for 20 cents on the dollar, to a locked room in a property, at a 1 to 1 ratio (value = cost), and becomes dead money. In both cases, the value is the same. In the case of 20% down, your cash magically grows to 5 times its value going in. It doesn't matter what the market is. The explanation I just gave is the same.
The added difference, again favoring the 20% down (always), is appreciation. The appreciation gained has absolutely nothing to do with the equity in a property. It's based on property value, which would be the same if you paid 100% or 20% for that property. The difference in value comes because the 20% will get you 5 times as many properties, 5 times as many cash flows, and 5 times as much property value, thus 5 times as much appreciation...the equity, or cost going in, is the same for both options. The total equity/cost in the case of the 20% option is spread over 5 properties...or 5 times the value in one property.
Save your cash and finance it you can use your cash elsewhere and have a tenant pay the mortgage on it.
I would go the 20% down route for reasons that others have mentioned, mainly that you can recover your cash more quickly that way and that you would have additional money available to invest in another property if you would so choose. Doing so, you may be able to double that monthly cash flow, coming up with the same total monthly cash flow, but building equity (and possibly appreciation) in multiple properties rather than just one.
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.