Short Term Rental Riches 164. Cash on Cash Returns Explained
One of the upsides to real estate investing vs. other investments, stocks for example, is that with real estate we can know when we buy a property if it’s a good investment or not. It all comes down to the numbers. While there are a lot of metrics out there to compare investments there are a few that are more important and one in particular that every conservative investor should have in their tool belt.If I had to choose just one metric, it would be the Cash-on-Cash (COC) return. This tells us how much cash we are actually making at the end of the day–which, to me as a conservative investor, is always more important than what we could make. By investing for appreciation for example. In our current economic environment you can pretty much kiss your appreciation returns goodbye since the market is dropping. BUT we can still find properties that earn a good return and to do that we will need to fully understand the COC metric. To take it one step further, as short-term rental investors, we need to add in a few items to make sure that we are accurately calculating our potential returns. Let's break that all down this week to make sure you are not getting into a deal that doesn’t make sense.
- What is the cash on cash return?
- An easy example
- Historic averages
- Today’s averages
- Why the annualized COC return is important
- Why CAP rates are not as useful.
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