Why is Cash on Cash Return (or Yield) our Key Metric
We feel that the return or yield on our capital deployed to secure, close and repair an income producing asset is the single most import metric to track and watch. We use it to evaluate every single investment. We use it to evaluate and compare investment options across different types of property. It allows us to compare a single family home with a duplex a four plex or small apartment building.
For example when we go to Fresno we may have a list of 10 potential investments to review. By reviewing each property we can do a couple of things. First we can simply discard a couple because of area, condition or neighborhood. But more importantly we can get a better estimate of repair or what we call “Make Ready” costs. This data will be a critical piece in our investment decision as make ready costs can vary substantially across investment options.
When we get back home and review our day we put the make ready cost into the spreadsheet for each property and we review the expected return or yield. Note we had most of the spreadsheet already created before we went down for the weekend. Did we mention we love this stuff?
Sometimes the clean house with minor repairs will offer the best return and sometimes the junkie house that offers a chance to add a bedroom will provide the best return. There is no one size fits all answer and that is why the Cash on Cash Return (or Yield) is such an important metric to use and understand.
The simple formula we use is:
Expected Yearly Cash Flow / (Down Payment + Closing Cost + Make Ready) *100 (This will become the expected yield expressed as a percentage)
We suggest new investors build a spreadsheet with no less than 50 properties (and Ideally 100 properties) before they make an investment. Yes, I know this is real work and will take time. But if you don’t put in the work how will you know you are looking at a good investment.
If you look at 5 properties and pick the best one without doing your homework I would suggest you are gambling not investing. If you don't have time or you don't want to put in the work you might want to look at becoming a passive investor as you might be taking large risks without doing the upfront work.
You need to understand how your investments stack up to insure you are making the best investment decisions.
Good Investing
