As a newbie, I look at both. I moved to a new area for my fiancees job and left my old career behind and needed to start over. Fortunately she makes enough to support both of us and give me an opportunity to start a new career in real estate. Our first 2 investments were to get cash flow to help bridge the gap of the income that I wasn’t making. But we also knew that I wouldn’t be not making money forever and we wanted investments that had the chance to appreciate and really let us grow our wealth so that we don’t have to be stressed about things like “how are we going to put kids through college.”
In my opinion, cash flow is more important than ROI. You take dollars to the bank, not percentages. Sometimes people mistakenly assume that cheap properties cash flow better than higher end properties but it’s usually the reverse. They theoretically might have higher ROI, but will nearly always have lower cash flow. Cash flow is a function of rent and expenses. ROI is a function of net income and price. A property renting for $600 is never going to produce more cash flow than a property renting for $800 in the same market. It’s basic math. I’ll take the dollars over percentage any day.
I bought homes in 2003-2004 that we expected to sell within 5 years. But we had a recession instead. In some of those cases my value today is only slightly higher than it was when I purchased them. But my $995 rents are now $1200. And my mortgages got paid down by my tenants. My cash flow allowed us to continue making payments even when there was no appreciation happening. For the average landlord, make sure there is adequate cash flow to weather the storms -financial and physical. Then you will be in a position to enjoy the appreciation when it comes and calculate a big ROI.
I do everything short-term, so I only care about the ROI. If the ROI is above 15% on a flip, I will be interested. I mean, if I am buying a property and rehabbing it and my total cost is $300,000, I want to make over $45,000 as quickly as possible. If I am doing this several times per year, with the same $300,000, the total ROI can be over 50% ROI per year. I know there are a lot of people who like cash-flow, but I like raw cash, in my bank account ready to invest in the next great deal.
Reasoning: Only Wholesales and Flips Properties.
Real Estate Investor, Seattle: ROI
We are long term investor in the Seattle area. Homes near the city average 500k and the “good” ones can easily go for more. Since we’re long term, our focus is on ROI. We’re still young, and will be using real estate to fund retirement (pensions don’t exist and 401ks are volatile). We roughly break even on all of these investments for now. So CoC is less interesting from that perspective. Also, we tend to purchase SF homes near high potential development areas. If zoning laws change, which is likely, we will see tremendous upside from these investments.
Reasoning: Young and Growing Firm
Real Estate Investor, South Carolina: Cash Flow
My basic rule is that yes, a property has to cash flow after all the expenses are paid, and I have my own criteria for each type of investment that I hold (per door.) I also look for a minimum amount of CoC/ROI. I don’t really concern myself with what a property earns compared to what it is valued at, I care about what sort of return am I getting on the money I had to spend to buy that investment.
In my area I have learned that different properties perform at different levels and what is acceptable for each. In the end, as long as the property is providing a level of PCF that I am comfortable with, I really only care about one formula. %= PCF/Cost of investment.
I also look at IRR at the end of the year just to get a better understanding of how well the property is performing overall, but I can’t pay my bills with non-liquid returns like appreciation, mortgage paydown & tax savings.
Reasoning: Only Concern is Return & Value
Real Estate Investor, South Carolina: Cash Flow
My basic rule is that yes, a property has to cash flow after all the expenses are paid, and I have my own criteria for each type of investment that I hold (per door). I also look for a minimum amount of CoC/ROI. I don’t really concern myself with what a property earns compared to what it is valued at, I care about what sort of return am I getting on the money I had to spend to buy that investment.
In my area I have learned that different properties perform at different levels and what is acceptable for each. In the end, as long as the property is providing a level of PCF that I am comfortable with, I really only care about one formula. %= PCF/Cost of investment. I also look at IRR at the end of the year just to get a better understanding of how well the property is performing overall, but I can’t pay my bills with non-liquid returns like appreciation, mortgage paydown & tax savings. Just my thought, as this thread shows, everyone has their own metrics, numbers & figures that they use when determining weather a property is a good deal for them or now.
Reasoning: Follows Own Criteria
Considering the last investor’s “own criteria”, should he change his metrics as markets change or is he better off using this one formula for all future investments? Let us know your response to this question and other investment strategies from the above experts by commenting on our
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