Your Down Payment's Best Friend: Measuring Real Estate Success

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Ever wondered what separates successful real estate investors from those constantly feeding money into their properties? The answer might be simpler than you think.

Cash on cash return stands as the ultimate metric for measuring real estate investment success. It cuts through the noise of speculative appreciation and trendy market predictions to reveal what truly matters - how much money your property generates compared to what you put in. When you're considering tying up hundreds of thousands of dollars in a deal, this straightforward calculation tells you exactly what return you're getting on your investment.

While many investors get seduced by appreciation potential or recent rent growth trends, these factors don't guarantee future performance. The podcast host targets 15-25% cash on cash returns, with 20% providing enough buffer to withstand unexpected expenses without requiring additional capital contributions. In today's challenging market, finding properties yielding 25% has become increasingly rare, making 15% a more realistic target for most investors.

Property taxes represent a particularly insidious expense that often increases dramatically after purchase. Many investors calculate returns using current tax assessments without considering potential 20-40% increases that can devastate cash flow projections. Unlike rent increases, which face market limitations, property tax hikes are virtually guaranteed in most markets.

Ready to transform your real estate investment approach? Start evaluating properties based on actual cash performance rather than speculative future gains. Your investment dollars - and your financial future - will thank you. Share your thoughts on cash on cash return targets in the comments below!

Episode Transcript

Speaker 0 (00:00):
What's up everybody, welcome back.
Today's episode is all aboutcash on cash return.
It's the only thing I thinkthat matters and that's what
we're going to talk about.
So the idea cash on cash returnhow much money did I put in the
property, aka my down paymentgenerally, and how much money am
I going to get back out as faras what I'm getting after?
Everything is excluded.
So that means rent comes in,taxes come out, property

(00:23):
management comes out, utilitiescome out, maintenance comes out,
all that stuff comes out.
Whatever that number is left atthe end, how does that look
compared to what I put down,usually looked at year by year?
So how much money do I bring ina year versus how much money
did I put down?
What's that ratio?
Is that 10%?
So in that case, that meansyou're getting $10,000 a year
versus $100,000 down.
Is it more, is it less?

(00:44):
What is a good number For me?
I think 20% has always been mysweet spot.
I know that I can withstandsome issues and still at least
break even.
I'm not going to be feeding it,and feeding it just means
giving it more money to stayafloat.
So that's something that'simportant to me, because I don't
really want to feed thoseproperties.
I'd rather the money that I'mmaking from my job flying
full-time.
I'd rather that money go intobuying more property so I can

(01:06):
just continue to make this thinggrow.
That's what's really importantto me.
A lot of people they factor inoh, this property is going to
appreciate.
Man, this area has been hot,it's going to appreciate, is it,
though?
Does anybody know?
Do they know?
They don't know Appreciationyou can throw that out the
window.
Oh, rent, last three years,rent's gone up 12% a year or 15%
a year.
Okay, how long is that going togo for?
Have people's wages gone up tothe commensurate amount?

(01:28):
No, so how long does that gofor?
Does that go forever?
And maybe it will, and I'm sureI'll be proven wrong many times
, but when I'm factoring thisstuff into my math of whether or
not I'm going to put downpotentially hundreds of
thousands of dollars into a deal, I'm not going to sit there and
say, man, rent from 2020 to2023 was just going off the
chain.
It's going to continue into thefuture.
That's like a fallacy that a lotof people come into and that's

(01:50):
just not.
That's usually not reality.
So 2020 was a wild time and alot of cash got infused into the
market and caused things to goweird, and people just expect
that's just going to go forever.
So it's not.
But I can tell you one thingthat will go up is probably your
property taxes.
You might go into this deal.
In this deal that we talkedabout earlier today, 133 a month
in taxes is what we're payingright now.
But when we buy this property,is it going to stay there?

(02:10):
No, last year I had so manyproperties that went up 20, 30,
40% in their assessment, whichmeans my taxes are going to go
up next year by that amount andnot by that amount necessarily,
but by that percentage.
And then they do a whole millrate and this, and that I don't
really know how it all works.
I just don't mean that it'sgoing to cost me more money.
So it's pretty simple in myeyes.
So all these things that peoplefactor in to try to justify a

(02:34):
property's value increase downthe road doesn't actually change
what you're making per month.
The only thing that wouldchange, maybe, is if you got
higher rents and there are caseswhere there are under market
rents I'm not saying thatthere's not, but if the property
is near market and your onlyhope of making cash is that the
market continues to go up andyou can raise rents next year.
You're putting yourself in aprecarious spot because if it

(02:55):
doesn't happen now, you'refeeding it, and that's okay.
Honestly, I don't think that'sthe worst idea sometimes if you
have a property that you reallywant to bet on long-term, but
when you're starting out, youdon't need a property that
you're going to feed.
You don't need another headache.
You need something that's goingto actually produce for you,
whether that's equity rent orboth, ideally and that's really
the situation you want to find.

(03:20):
You want to find a propertythat at Even for me 63 units
what we're actually seeing afterall of our expenses, is not
enough that any of us wouldreally want to or could quit our
jobs.
But the money that is reallysignificant and has changed all
of our lives for the better isthe equity side of it, and
that's where we've seen hundredsof thousands, if not millions,
of dollars in appreciation.
Now, what does that really mean?

(03:42):
It's tough, because theappreciation number you have to
factor in inflation and ifyou're looking at a property and
say, in 2018, it was 160,000and now it's 320,000.
In that time, how muchinflation has occurred, and you
really can't.
You can't compare them.
They're apples and oranges.
So I think that's where a lotof these issues come into play
and that's why I don't look atany of that.
I look on cash on cash.
Once my money is tied up inthat deal, I'm paying back with

(04:04):
it with cheaper, inflateddollars as time goes on, and so
to me, the metric of cash oncash seems like just the
simplest and easiest way to knowif a property is producing, and
that's how any business wouldoperate how much money did I put
in versus how much money I'mgetting out?
So people in real estate try toget really weird with the way
that they connive their waythrough these deals, and I think
that's insanity.
It puts people in really badpositions because people get

(04:26):
sold deals that are terrible andthey end up paying for them
because they're like you knowwhat, down the road I trust this
guy Down the road, this isgoing to be worth more and they
end up getting bit in the ass.
So keep that in mind whenyou're looking at a property.
Cash on cash return is key, Iwould say.
For me, I'm looking at anywherebetween probably 15 and 25%.
Cash on cash is like probablythe golden zone, and these days

(04:47):
you're probably looking moretowards that 15%.
Finding something that'sspinning off 25% cash on cash is
hard to do.
So again, quick lesson,something that not even a lesson
I hate calling it a lessonbecause I don't even know what
I'm doing but a quick kind ofthought to move forward with and
maybe it benefits you, maybe itdoesn't, but, as always,
appreciate you guys, anybodythat's listening and watching

(05:08):
this, I really appreciate it.
I'm going to continue to putthese out, just quick little
segments and then eventuallymove into some more longer form
content.
Any comments?
With video, lighting, audio,whatever it is?
Let me know and I say thatbecause in the middle of this my
light like literally died myfill light.
So I am literally making thisup as I go.

(05:28):
I've got my iPhone mounted on acardboard box right now, so
this is about as about as wildas it gets.
So let me know, I'll try to domy best to improve in the future
and we'll talk to you soon.
Thanks.