Importance of cash flow vs cash-on-cash ROI

[Eric T.]

Hi all, 

Brandon Turner mentioned in a webinar that he typically looks for properties that will meet BOTH a certain minimum cash flow amount and cash-on-cash ROI. For example, when it comes to single family homes, he'd like to see at least $200 cash flow and 10 - 12% COCROI.

What's the importance of meeting both of these criteria? What if you find a deal that has 20% COCROI but the cash flow is only $50? Does the cash flow matter much if your COCROI is super high? 

[Guifre Mora]

Originally posted by @Eric T.:

Hi all, 

Brandon Turner mentioned in a webinar that he typically looks for properties that will meet BOTH a certain minimum cash flow amount and cash-on-cash ROI. For example, when it comes to single family homes, he'd like to see at least $200 cash flow and 10 - 12% COCROI.

What's the importance of meeting both of these criteria? What if you find a deal that has 20% COCROI but the cash flow is only $50? Does the cash flow matter much if your COCROI is super high? 

 

Both cash on cash return and cash flow are critical metrics. You’re measuring stability vs total return. 

In my opinion, cash flow is more important than ROI. You take dollars to the bank, not percentages.

Cash flow is a function of rent, debt, and expenses. (Lower debt or fewer expenses or higher rent = higher cash flow)

ROI is a function of initial investment and cash flow. (lower investment = higher ROI)

A property renting for $1000 is never going to produce more cash flow than a property renting for $1500 in the same market. It’s basic math.