The Top 2 Metrics You Need to Know In Any Real Estate Investing Deal
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- Cash-on-cash return
- Total cash flow
So, those two things I care about more than almost anything else, right. Which makes sense. Cash-on-cash return is what percentage of my investment am I making back every single year in profit from the cash flow? And cash flow is like a dollar amount: How much per month am I actually making?
What’s a Good Cash-on-Cash Return? What’s Good Cash Flow?
Now, I oftentimes say that for cash-and-cash return, I aim for 10-12%. That’s what I want for cash-and-cash return. And I aim for between $100-200 a month in cash flow per unit.
A question I got recently on a webinar was: What if the actual dollar amount looked pretty good—$200 on a single-family house—but it was only getting a 5% return… would I do that? Great question.
So, here’s how I look at that. If I’m just getting started, trying to buy my very first deal, and only getting a 5% return—if I know that I would have more money where that came from—I would probably do it just to start building momentum. That’s so long as I was really confident in that 5% number. Because I believe that in the beginning, momentum is more important than your actual return on a single investment—the knowledge and experience you gain are invaluable.
However, that said, I would normally say the cash-and-cash return number—the percentage—is more important than your dollar amount. Why am I even looking at two numbers to being with? That’s because without using both those metrics, you can manipulate it.
Beware of Manipulating Metrics
For example, what if I had a property that was making me $200 per month? It fits my metric, right? But say it cost me $10 million to buy that property. That would be a horrible deal! It would be a super low—like a 0.0001%—cash-on-cash return.
Now, on the other hand, what if I had a property that was giving me a 50% return on investment? Whoa, that’s really good! But that just might mean I put $2 into the deal because it was almost a no-money-down deal. And I made back only $1 the entire year. I was making back like $0.08 a month. That’s a horrible deal, right?
That’s why I want both these things now. Generally speaking, I care more about my percentage return than I do my cash-flow number; however, I would like to have both those hit my metrics. But again, I would be willing—on an early deal, just to build momentum—to go a little bit lower than that.