CoC Return vs. Pure Cash Flow

[Cade Miller]

First of all, I'm very new to this, so I've just been trying to learn as much as possible. I have been researching properties around my area and using the rental calculator to determine if it is a good deal or not. A couple of rules I have been trying to follow is at least $100 in pure cash flow per unit, as well as a 10% CoC return. However, I keep getting hung up on the second metric. If I were able to purchase the property with cash, my CoC goes down significantly. Can someone help me further understand the implications of cash purchases? I feel stupid for not grasping this concept.

[Joe Villeneuve]

When you are buying a rental property, your cost is ONLY the cash that comes out of your pocket...period.  The rest of the cost of that property is being paid by the tenant.  When you pay all cash, you're cost is 100% of that property.  When you leverage it, say 20% DP, that property only cost you 20% of the property value...this means your money (cash) nought you a property worth 5 times what it cost you.

CoCR is ONLY measured for the first year...which tells you how much of your cash (your cost) you recovered in that first year of ownership.  This is important since you will not make a profit until you have recovered ALL of your cost.

To this end, the better, and more important metric, is how long it will take you to recover all of your cost...so you will know how long it will take you to start making a profit.  This is where cash flow comes in.

Example: Starting with $100k in cash 

Given:
1 - Property Cost = $100k
2 - Cash flow if paid all cash (no lebt) = $10k
3 - Annual debt pmts if using 20% DP = $5k
4 - CF using #3 = $5k/y

Options to Buy:
Option 1:  100% cash
# of Properties:  1
Property Cost = $100k/ea;  Total Cost = $100k
Property Value = $100k/ea;  Total PV = $100k
Cash Flow = $10/yr/ea;  Total CF = $10k/yr
Years to pay back total cost = 10

Option 2: 20% cash, 80% loan
# of Properties: 5
Property Cost = $20k/ea; Total Cost = $100k
Property Value = $100k/ea; Total PV = $500k
Cash Flow = $5/yr/ea; Total CF = $25k/yr
Years to pay back total cost = 4