Cash Flow VS. Everything Else (ROI, Cash on Cash, NOI, ETC...)

[Corey Cowan]

I am just now officially starting my journey into real estate.  I own two properties and neither of them are currently acting as investments other than mortgage pay down and whatever appreciation the market creates in the future.  

In this process of officially starting my journey I have defined my goals and my reasons for those goals which leads to the most important part of any real goal...a STRATEGY.  

With regards to a STRATEGY many questions arise.  My primary goals are Cash Flow oriented.  My primary question I seek to have answered by posting this post is fairly straight forward, yet I encourage debate concerning metrics and comparisons.  

For normative Investment Properties (properties that are Deals but not Steals), what percentage of rent is Positive Cash Flow?

      Example:  Investor wants $220 in Positive Cash Flow on 1 property.  

Here in Southwestern Missouri  a relatively inexpensive rent would be $650.  An expensive rent may be $1500.  In this scenario I suggest that the percentage of rent lies between 14% to34% non-respectively. If any of you have insight into local rents feel free to align my position with reality if it deviates from it in a consequential way.  

Agree or Disagree?

If this is the case and an Investor here in Southwest Missouri wanted $12,000 in monthly Positive Cash Flow his/her total Rent would need to be approx $36,000-$86,000?

Now for the stirring of "The Pot" (this is because I know some of you love to set the record straight...I've been watching you :)

All financial metrics are for comparison.  All metrics are either percentages or representations of relationships.  These metrics are used to compare.  Usually to compare "opportunities"  A $100,000 investment that makes $15,000 vs $12,000 yearly is definitively better.  If one were to chose a property based on a Metric they would take the one with the higher return all other things being equal (we know they are not equal).  

Example:

If an investor had only 2 options for eternity and he/she was only able to eat food purchased with the Cash Flow from the decision: 

1. Put all available funds into an investment that generated $400 Positive Cash Flow or 

2. Put zero money down on an investment that generated $200 Positive Cash Flow. 

Which is actually better?  All investors are seeking opportunities.  For someone new the number of opportunities would seem to likely be fewer than the more experienced and active investors.  If this is the case should the investor make his decision to begin his/her portfolio with properties that meet a Positive Cash Flow expectation or a Metric?

When debating statistical performances then the game becomes how to display the metrics. If one were debating Cash or Value then its not a matter of metrics, it is a fixed reality? This is a question, sort of. $100,000 in cash or Equity is better than $50,000 in cash or Equity even though the ROI, COC, NOI, ETC... may be higher...or lower NOI.. on the Deal that generated $50,000 in Cash or Equity.

"I value metrics and I hope you do too" to a room full of bored kids - Corey Cowan  jk

But seriously.  As new investors are attempting to map out a STRATEGY that is honorable enough to get Props from BP members where should the focus be?  I posit that Cash Flow and the relationship that Equity has as a function of Cash is where one's focus should be.  This is assuming that an individual is planning for Financial Freedom...vs "dominating the market" or shaming ones peers where ego is the actual value at hand.  

What do you make of all this?  Forgive me I am the new guy.  This is my first post.

[Joe Villeneuve]

First thing I would do is stop using percentages to compare returns.  They tell you nothing since you can't spend or save them.  Compare dollars only.

Second, I would suggest you follow the money...the cash money...when you analyze your strategies. This isn't the stock market. When you try to analyze RE like you would the stock market, you miss out on all that REI has to offer that makes it stand out from the stock market...and other investments.

Third, Cash is more valuable than equity...by far.  You can exponentially grow cash.

Forth, which is a spinoff of third, leveraging will get you a greater return than all cash (meaning buying your equity).  

Example:  If you have a choice between paying $100k for a property or 20k and leveraging $80k, you are far better off only spending $20k.

Numbers:  $20k down = $200/m or $2400/yr; $100k down = $400/m or $4800/yr.

Buy 2 properties using $20k down for each and you have the same cash flow as the $100k DP option.  Use the rest of the $60k on 3 more $20k DP properties and you have 2.5 times the CF as the $100k option.

Fifth, it isn't about owning...it's about controlling.

Sixth, never have a negative CF property.  If you do, sell it as fast as you can and move on.  Also, NEVER think that if you pay a larger DP on a negative CF property, you are somehow changing it to a positive CF Property.  All you're doing is paying all that negative CF upfront.

Seventh, Cash is liquid and has a future.  Equity is dead and has the exact same face value as the cash you used to buy the equity...it's just in a different location.

Eighth, Appreciation is exactly the same for the $20k property and the $100k property.  They're both worth $100k from the start.

Ninth, Never Spend your Seed Money...only Spend your Profits.  Use your Seed Money to infinity.

Tenth, memorize this number sequence...1073741824,...and learn what it means. It is the secret formula to REI success.