Real estate investing offers clarity that stocks often lack, especially when calculating cash on cash return. This crucial metric reveals how much cash flow an investment truly generates. In today’s market, understanding COC is essential, particularly for short-term rentals, as appreciation may decline. The discussion includes practical examples, historic and current averages, and why conservative projections are vital for making sound investment decisions. Tune in to grasp the nuances of maximizing your returns!
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volunteer_activism ADVICE
Calculate Cash-on-Cash Return First
Always calculate cash-on-cash return before buying an investment property.
Use conservative income projections and subtract all property expenses for accuracy.
insights INSIGHT
Mortgage Principal Builds Equity
Principal mortgage payments are not expenses since they build equity.
Tenants effectively pay down your mortgage, increasing your property ownership.
question_answer ANECDOTE
Cash-on-Cash Return Example
Example: $100,000 property with $20,000 down and $10,000 yearly expenses.
Net profit of $10,000 yields a 33% cash-on-cash return in the first year.
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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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