Cash On Cash Return...Or, should I use another metric?

Question

Greetings -- Thanks much in advance for your consideration. Measuring Cash On Cash returns is a go-to benchmark for me. However, it doesn't seem to make sense in the case of a cash-out refi when there's sufficient equity to take your initial actual cash investment completely out. For example: What investment ROI metric should I use when:

1. We acquire a rental property for $80,000. 2. We invest $25,000 for rehab. 3. The rehabbed property appraises for $160,000. 4. The bank is willing to finance 80% of the appraised value up to $128,000. 5. We refi for $105,000 essentially zeroing out our cash investment. In this example, our Cash Investment is ultimately zeroed out. As such, how do you measure a Cash On Cash Return when the Initial Investment is, more or less, zero, but still results in a positive annual cash flow of around $5,000.00? Thanks much for helping me think through this...I feel like Captain Obvious is about to deliver me some tuition. :) I'm OK with that....

Michael Haas · Answer

One great metric to add to the mix is GRM (Gross Rent Multiplier). Since it looks simply at the purchase price / value & gross yearly rents its easy to compare apples to apples and evaluate the quality of one investment compared to another, without different loan options and different cash outlays skewing the numbers too much.PS: I'll second what others have said - when executed right, BRRRR is amazing :)

Scott Sklare · Answer

Your cash on cash is infinite. That is what makes BRRRR so amazing.

Everett Stephens · Answer

Thanks much Jeff! I appreciate your solid and thoughtful context. I never thought about the these deals as the "Textbook BRRRR" structures until this thread. It definitely feels reassuring. I've been in this about a year, and just acquired my 20th property. I've been able to score sufficient equity to zero out my actual cash investments in about 25% of my deals (SFRs in Memphis TN). I do like the Cash On Cash Return metric, as you pointed out, as a benchmark of asset specific returns. I'm definitely going to adjust my goals slightly after reading this to tackle more opportunities that have a greater likelihood of zeroing out my initial investment. Thanks again for taking the time to respond.

Everett Stephens · Answer

That's funny! I promise that was not my intent at all...I'm hungry to learn being relatively new to the biz. But, yeah, I'll take it and try to keep this acquisition model on repeat.

Jeff Copeland · Answer

In your case, you essentially have infinite returns - a home run and textbook BRRRR (congrats!). But just because you can put very little money down does not always make something a great investment. Cash on Cash return does not tell you how the property actually performs compared to the market, or to other properties in the same class. It's a personal metric that really only applies to you in the context of a single deal. Cap Rate is a better metric for comparing the performance of different properties, or a single property to the broader market. Both metrics are useful, they just have different purposes.

Chris John · Answer

@Everett StephensIn that case, your only choice of action is to get on BP and humble brag. haha. Just kidding. Congrats! That's awesome!

Nate Sanow · Answer

I agree it is infinite. I do think “return on equity” is valid to consider. Especially if someday you’d rather have that same equity in a different property with better ROE. But, that’s hard to be in a hurry when you’re getting ROI on 0% on paper… so.. I get it. Best wishes.

JD Martin · Answer

Personally I find COC to be of marginal use to me because it doesn't account for concurrent risk involved in that return - unless I'm paying all cash for a property without plans to finance out of it (which I have done on a number of my houses, I didn't "brrrr" all of them). If I'm using leverage I really want to know my rate of return on the total investment - mine and the bank's - because I am responsible for making my partner whole (i.e. paying my mortgage, regardless of the rental market). You can have infinite COC and a rental that brings in $5 a month. To me that would be way too much risk vs. reward. It can be useful to compare to other types of investments, but most other investments you are typically not using anyone's money except your own (leaving out things like marginal stock investing, etc). So in your example I'd be much more interested in knowing that my total rate of return after expenses, using your example (assuming 50% expenses) is 4.8% ($5k/$105k). And if your rents don't climb as fast or faster than the value of the home, the opportunity rate (ie your cap rate)is going to shrink over time (right now, it would be 3.1%). All of that of course must factor into your overall financial goals and desired level of wealth. I know a lot of people who care not 5 cents that their cap rate is 2% because the property is a piece of cake and they have more money than they need or want to bother with right now anyway. Part of me is that way - otherwise I'd finance out my cash houses, because financially speaking the paid-off house isn't (or at least wasn't, before interest rates climbed) a good use of capital in a low-interest rate environment.

Alex Hochberger · Answer

I think you have to impute the "cash" or equivalent you've put in.But you have "cash" in the business, it's the opportunity cost. If you sold the house as a flip, what would have happened. $160K value - 10% closing costs = $144,4\000. If you sold it, you'd have $144,000 in cash, less the $105,000 you put in, so you have $39,000 "invested" in the property, even though your original capital is back out. If you want to be fancier, that $39K is really $26K because of income taxes, so you can run it off $26K.So it really depends what you are trying to figure out. But in choosing to "Refinance" instead of "Sell" you are leaving cash in the house, it's probably worth using that as your denominator, that's the value you created from running the rehab job.

Matthew Morrow · Answer

Your COC is essentially the metric to use when comparing RE investing vs other asset classes. 100K cash into a home, or 100K into gold, bitcoin, Vanguard, etc. The the only true comparative metric to other investments. But the guys are right- your BRRR model is infinite COC if you pull all the $ out plus some.