Cash on cash analysis effecting your decision making

[Seyed Javaheri]

How important is cash on cash concept versus other components of analysis of a rehab or rental? what percentage is acceptable to an investor to move forward with a deal? 

[John Jacobus]

@Seyed Javaheri The attractiveness of the cash on cash return for your deal should be evaluated relative to the prospective rates of return that your investors could earn by pursuing other opportunities.  It also depends on the qualities that your investors value in prospective investment opportunities (i.e., cash yield vs. capital appreciation). 

If your investors seek high yield investment opportunities, then your deal should produce at least 5-6% cash on cash return.  If the cash return falls below this level and the deal doesn't have a capital appreciation component to it, then your deal won't look very appealing to potential yield-seeking investors.  This is because they can pursue other options and achieve similar or better cash on cash returns.  

Alternatively, if your deal has an attractive capital appreciation component to it then your cash on cash return may not need to be as high--though it should be >0% in my view--if you are marketing it to a group of investors who are looking for capital appreciation instead of cash yield.

For yield-seeking investors, they will be comparing your deal to some of the income-generating investment vehicles listed below.  Research the returns of these vehicles to determine how competitive your deals are from a yield perspective.

• Publicly Traded Large-Cap Dividend Paying Equity Securities - ~2% yield
• 10-year US Government Bond - ~2.4% yield
• 30-year US Government Bond - ~3% yield

For investors seeking capital appreciation, they will be comparing your deal to some of the investment vehicles listed below.  Research the returns of these vehicles to determine how competitive your deals are from a capital appreciation perspective.

• Publicly Traded Large-Cap Equity Securities - 7-10%
• Early-stage Private Company Investments - 15-30%
• Med/Large Value-add Class B & C Multifamily Projects - 12-25%

If your deals offer a mix of cash yield and capital appreciation, which most real estate investment opportunities do, then your yield and capital appreciation projections should fall somewhere in between the options above.  

A good way to understand the competitiveness of your deals is to speak to investors and understand what they seek in their investments.  They will provide you with an indication of what they value in terms of yield, capital appreciation, holding period, volatility, etc.  This will help you market your deals to the right investors.  It will also help you determine if the deal you're sitting on will be attractive to others based on your projected returns.