Important metrics when buying with cash?

[Paul Saunders]

I understand the concept of making sure your property cash flows if you have a mortgage in place, but I was curious how investors evaluate a property if they are purchasing with cash outright. Obviously the property will cash flow right away, but that doesn't mean it was a good investment, so what exactly tells you it is a good deal?

[Terrance Dexter]

To answer this question I would first say to always invest in an area that you would feel comfortable having your kids or family in. With that said, in this example I will use a combination of the 50% rule and the equations for cash flow and Cash on Cash ROI to determine if its a good investment.

The 50% Rule is being used as an example only, when running these numbers on a real investment I would use real numbers to calculate the expenses.   The COCROI is a percentage that can be compared to stock market returns.

Monthly Income - Monthly Expenses = Cash Flow

Total Annual Cash Flow / Total Investment = Cash on Cash ROI

So lets say the property was listed or negotiated for $50,000 and rents for $900/mo. The 50% rule tells us that $450 of that $900 will go to expenses, not to include the mortgage, which for this I will just use zillow mortgage calculator with the APR adjusted to 5%,

$900 (Income) - $450 (Expenses) = $450 Cash Flow

$450x12=  5,400 (Total Annual Cash Flow)

$5,400 / $50,000 (Total Investment) = .108 or 10.8% COCROI

If you purchased that same house using a mortgage with 20% down ($10,000) and a 5% APR then your mortgage payments would be roughly $215/mo (P&I) according to zillow mortgage calculator and the numbers would look like this:

MORTGAGED PROPERTY

$900 (Income) - $450 (Expenses) - $215 (Mortgage P&I) = $235 Cash Flow

$235x12 = $2,820 (Total Annual Cash Flow)

$2,820 / $10,000 (Total Investment) = .282 or 28.2% COCROI

In this example, it just makes more since to leverage a mortgage in my opinion.

Good luck to you, Happy Investing!