A Clarification About Cash on Cash Returns

[Bennett Dickerson]

I am just starting out and one of the first articles I have read in-depth was about cash on cash returns. The concept and calculation makes sense but I have one clarification.

I was doing some calculations of my own, using the formula

annual pretax cash flow /  cash invested x 100% = cash on cash returns

I first used an example where I bought the entire house in cash and as a result, was very confused by the resulting return. I calculated that you would need about $100,000 / year in cash flow to reach the desired cash on cash return % on a $750k house purchased in cash.

Would I be correct in saying that this is not an appropriate metric for cash deals? Or is it the perfect option because it shows that buying in all cash is not the ideal method for maximizing return?

[Steve Vaughan]

Quote from @Bennett Dickerson:

I am just starting out and one of the first articles I have read in-depth was about cash on cash returns. The concept and calculation makes sense but I have one clarification.

I was doing some calculations of my own, using the formula

annual pretax cash flow /  cash invested x 100% = cash on cash returns

I first used an example where I bought the entire house in cash and as a result, was very confused by the resulting return. I calculated that you would need about $100,000 / year in cash flow to reach the desired cash on cash return % on a $750k house purchased in cash.

Would I be correct in saying that this is not an appropriate metric for cash deals? Or is it the perfect option because it shows that buying in all cash is not the ideal method for maximizing return?

13% COC on leveraged investments was my min goal while I was buying. If your goal is cash-flow and COC, prudent leverage when acquiring bankable vanilla residential property is the way to go.

When buying with cash, my 13% return goal would be and is to gain that in equity capture by buying below market value.
  
Buying with cash is more of a return on equity discussion.  My ROE goal was 7% self-managed,  6% with a PM. 

As equity grew and I could no longer maintain even a 6% ROE without a bunch of cost/effort while risk-free savings yields rose to 5%, I sold most. 

 Don't force a deal.  Use your cash to get a discount or keep it in a money market and earn 5% doing nothing with no risk.