What’s your
© Dmitry Ersler | Dreamstime.com
REAL Cash on Cash Return?
Written by: Jason McMurtry, MBA I was talking to a real estate investor the other day about potentially selling his rental property and the possibility of exchanging it for another, when he told me something unbelievable. By unbelievable, I mean I literally did not believe him. He said he wanted to sell the property but just couldn’t bring himself to do it because it was generating a 20% cash on cash return - from a single family rental property in Carlsbad, CA. He went on to tell me his tenants had been in place for about 10 years and he had done a great job maintaining the property and keeping rents at market rate. Beaming with pride Mr. Miller (name changed to protect the innocent) then explained to me that he purchased the property at a great price and had no debt so his cash flow was very high. Not wanting to offend Mr. Miller but certain there was some sort
of misunderstanding going on, I asked a few questions about the property and how his cash flow was being calculated. Were the property expenses being accurately deducted to calculate the net cash flow? Was there some sort of mistake in Mr. Miller’s math? Was this property a shortterm rental that only produced high cash flows some of the time, while generating zero cash flow at other times? I couldn’t find the disconnect, until Mr. Miller suddenly explained:
twenty thousand dollars per year is equal to 20% of his original investment of $100,000 but absolutely wrong about receiving a 20% cash on cash return on his investment in this property. When I asked Mr. Miller what the current value of his rental property was, he said he had received an offer not long ago for about one million dollars.
“Well, Mr. Miller, I have some good news and some bad news for you” I said. “The bad news is: “I purchased the property thirty you’re not getting a 20% cash on years ago for a hundred thousand cash return; it’s actually more like dollars and now it’s generating twenty a 2% return. The good news is, thousand dollars per year after you may be able to increase your expenses - a 20% cash on cash return! annual net cash flow by doing a I have considered selling the property tax-deferred 1031 several times but I’ve never been able exchange into a different to find another investment with nearly property.” as high a return.” The truth is, Mr. Miller was Now it all made sense. Mr. Miller making a very common mistake was absolutely correct that netting amongst real estate investors. February 2020 socalrha.org | 21
