162. Cap Rate vs. Cash-on-Cash Return — Which One Actually Makes You Money?

🌟 Cap Rates vs. Cash-on-Cash Return — What Actually Matters in Real Estate 🌟

Welcome to the Ekabo Home Financial Freedom Mastermind Webinar! In this session, host Niyi Adewole cuts through the confusion around the two most important metrics in real estate investing and reveals the exact return targets his team uses to build wealth through long-term and short-term rentals.

🔥 Quote of the Day: "If you're gonna get into real estate and put time, money, risk, and energy into it, you should be aiming to beat the stock market." — Niyi Adewole

💡 What This Means: The stock market averages 8–10% per year. Real estate needs to do better than that to be worth your time — and with leverage, cash flow, appreciation, and tax benefits all stacking together, it absolutely can.

🎙️ What You'll Learn:

1. The 4 Returns Real Estate Gives You Simultaneously: Cash flow, appreciation, principal pay down, and tax benefits — all stacking at the same time, unlike stocks which give you just one.
2. What Cap Rate Actually Is and How to Read It: NOI divided by purchase price — no mortgage included. A 3–5% cap means premium area, 6–8% is the cash flow sweet spot, and 9-plus means higher risk and more questions.
3. Why Cash-on-Cash Return Matters More for Residential Deals: Cap rate ignores financing — the very thing that makes real estate so powerful. Cash-on-cash tells you what's actually hitting your bank account each year based on what you actually put in.
4. Real Deals Walked Through Live: A $300K long-term rental producing a 12% cash-on-cash return, and a $300K short-term rental producing a 31.6% return — with real numbers, real expenses, and real mortgage payments.
5. The Short-Term Rental Tax Bonus: Bonus depreciation through cost segregation can wipe out roughly $69,000 of taxable income in year one — including W-2 income. Niyi used this across 4 properties to go from paying six figures in taxes to zero.
6. The 5 Most Common Mistakes Investors Make: From forgetting closing costs in your cash invested, to falling in love with a property before the numbers say yes — Niyi breaks down every pitfall and how to avoid them.

🏡 Key Takeaways:

➤ Cap Rates Compare Buildings. Cash-on-Cash Compares Deals — Use cash-on-cash for any residential deal where you're using financing.

➤ Know Your Targets — 12% cash-on-cash minimum for long-term rentals. 20% or more for short-term rentals.

➤ Cash-on-Cash Is Just Year One — Every year after, rent goes up while the mortgage stays the same. It only gets better from there.

🗓️ Tune in every Wednesday at 7 PM Eastern! Don’t miss out on our journey toward financial freedom through smart investments.

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 Our Links

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➣ Ekabo Home Network (IG, Youtube, Email) https://linktr.ee/ekabohome

Niyi Adewole is a licensed realtor in Georgia, brokered by EXP Realty. Feel free to reach out at Niyi.Adewole@exprealty.com if you would like to work with an investor friendly real estate agent.

Transcript

Welcome And The Financial Freedom Goal

SPEAKER_00 0:00

Welcome to the Financial Freedom Minster Money Group Podcast. Here we're all about breaking free from the 40 to 50 year work grind and accelerating our journey towards financial freedom. Join us every Wednesday at 7 p.m. Eastern as we explore different types of investments that can fast track your path to financial independence. We serve as a hub for connecting with fellow members during our sessions so you can share successes, ask questions, and keep the momentum going.

What Cap Rate And Cash On Cash Mean

SPEAKER_01 0:27

Okay, good afternoon, everyone. My name is Ni Yi Addwale, and I am an investor-friendly realtor based in Georgia, but my team, the Akaba Home Team, covers Georgia, Florida, and Texas. And today we are talking about cap rates, cash on cash return, and what actually matters when you're looking to go invest in real estate. I'm gonna give you my personal opinion, what I focus on, why we have these two metrics, and ways that you compare it to others as well. And so when you look at the whole point of investing in real estate, at least in my mind, the stock market over the last 30, 40, 50 years has averaged between eight and 10% year over year. Now I realize this year we're already up like 17% or something crazy. But on average, once you start to you know zoom out and see the fours from the trees, it's usually about eight to 10% per year if you're investing in you know an ETF, SP 500. And so if you're gonna get into real estate and put time, money, and risk and energy into it, you should be aiming to beat that metric. Ideally, you want to get 12% plus on a long-term rental, right? When it comes to your your average, and then on a short-term rental, you want to be getting 20 plus percent on that property as well. The good news is that with leverage that you can use to buy real estate, the tax benefits, the appreciation, and the cash flow real estate gives you those numbers, they are actually highly achievable. And the metric that tells you whether your a specific deal is gonna hit that cash on cash return is what we're gonna dive into today.

Beating The Stock Market Benchmark

SPEAKER_01 1:52

And so the first thing is before we get into the numbers, I want to zoom out and talk about return, appreciation, and things of that nature. So when you buy a stock, you essentially get one return, right? And the return is the price appreciation of that stock. Plus, some stocks do pay a small dividend if you're lucky. If you're buying like one of those dividend stocks where they're taking some of the company profits and they're pushing it back to you. When you buy a piece of real estate, you stack on four returns at the same time. The first is your cash flow, and this operates similar to a dividend, right? And when you calculate your actual cash flow, this is the money that you could take home each and every month and not have to worry about that investment falling to disrepair or things of that nature. It's like a dividend, but it's bigger and more controllable because every single year you can increase that dividend by increasing the price that your your tenants are paying for rent. And so I would ask you, right, when's the last time if you're renting, or if you can think back to when you were renting, that your rent stayed the same over a five-year period? Almost nobody can say that it did, right? It's gone up because the landlord raises the rent. And so that's the same thing with that cash flow. The second piece is your appreciation. The property itself goes up in value over time. If you just think back or even ask your parents or grandparents, hey, how much did it cost to buy real estate? You know, 50 years ago, it was a completely different story, right? Or even 30 years ago, or even 10 years ago, right? Real estate tends to go up and to the right. And as places tend to start to get overbuilt or more people move into different areas, the value of the land in that real estate continues to accelerate up and to the right. And so that's something you can depend on as well, is that appreciation. The third is the principal pay down. And this is one of my favorite, right? This is how you become an automatic millionaire by just buying one property, having a tenant pay it down over 30 years and just hanging on to it. Even if that property does not go up in value. So you buy a property for 300K, right? And it doesn't go up in value. At the end of those 30 years, you didn't pay out of those funds. The tenant did, and now you have a $300,000 um paid off property that you could sell and or pull the money out to do something else. And so principal pay down is when the tenant's paying it down, your loan bounce every month, and that equity that you didn't have to write a check for is being added to your net worth. And then the final piece is the tax benefits, right? When you talk about depreciation, if you're doing a long-term rental, it's depreciation over 27 years, which we'll get into all that. If you're talking about a short-term rental, you can do something called a bonus depreciation, which is one of the reasons and one of the ways I was able to exit corporate earlier than expected, is because I was able to do a lot of short-term rentals, do bonus depreciation on it, and save a heck of a lot in taxes. I went from paying six figures in

The Four Returns From Real Estate

SPEAKER_01 4:28

taxes certain years to paying zero and actually getting some money back from Uncle Sam in the latter years. You can also do 1031 exchanges where you change in a property for another and pay no taxes on it. And there's a lot of write-offs that can shelter not just rental income, but in some cases, your actual W-2 or other income that you have as well. On top of that, you have leverage, right? With the stock, there's ways to leverage it, but it can get very risky if that stock goes down. With real estate, you're typically putting anywhere between 20 and 25% down if you're doing a pure investment. And every dollar of the return you generate is calculated against your down payment, not the whole purchase, right? And so that's why a deal with a seven to eight percent cap rate can still throw you a 15 to 20% cash on cash return, which is incredible. The rent isn't static either. And one of my favorite parts every year is sending out the renewal notices to our tenants to go ahead and bump that rent. And that increase doesn't just add cash flow, but it raises the property's value too. Because when you're in you know small multifamily or large multifamily investments, people tend to pay more if that property is bringing in more money. And so let's talk about cap rate, right? We're gonna dive into it. Cap rate, what is cap rate? And I'm gonna share my screen here so I can show you some visuals. And everybody bear with me, I am still not the best with this webinar format. And so I'm gonna go here and we're gonna more share. We're gonna share our screen. Okay, so you should be able to see my notepad here. Yep, let me move this over. Okay, you should be able to see my notepad here. And I was remiss to say if you have any questions or anything that you want me to cover, please go ahead and throw it into the chat. We will make it happen from there. If you hear any background noise, that is just the Georgia rain opening up in the skies. Okay, so now

Cap Rate Formula With A Fourplex Example

SPEAKER_01 6:08

we're gonna get into cap rate. Okay, so cap rate. Cap rate is short for capitalization rate, and essentially it's a way to compare properties to each other without the noise of how you finance them. And it answers the question if I paid all cash for this building, what percentage return would the property itself produce in one year? That's how you're able to compare it with the stock market, the cap rate, right? If the stock market's bringing, you know, eight to ten percent each year on average, they usually look at that cap rate. But the thing they don't think about, you know, in the stock market when they're trying to compare these things is all those other four pieces that I talked about, as far as the cash flow, the cash flow, cash return, the appreciation, and the depreciation that can save you on taxes. But if we're looking at just the cap rate, right, which is one of the four, then that's that's what you're looking at. And it says if I paid all cash, what would this produce in one year? This is used a lot in multifamily and commercial real estate because it lets you stand two buildings next to each other and ask apples to apples which one's producing more income per dollar of price. And so cap rate equals price write this over here, equals your net operating income divided by your purchase price. Simple equation. And now we can have Chat GBT and Claude do all this for us. What NOI equals is all the rental income minus all the operating expenses, including taxes, insurance, property management, repairs, vacancy, utilities, etc., divided by the purchase price. NOI does not include your mortgage payment, and that's the whole point, right? It's as if you paid full-on cash for that property. And so mortgage payment is not included, it strips out the financing so you can compare that property and not the loan type that you're getting. And so if I wanted to give you a quick example, I have one of a small multifamily. This is literally a home that we actually put under contract right now. Now, these aren't the actual numbers from what it's bringing in, it's bringing in a bit more than this, but we have a million dollar property under contract, right? It's a fourplex. It's fourplex in Snellville, Georgia, and this is the purchase price. The gross rents, I'm just gonna make it 120K a year, right? Or 10,000 a month, 120K per year. We're gonna say your operating expenses are about 50,000. And where we're getting that is say you have to pay, you know, eight percent in management fees, say you have to do the landscaping, you've got the maintenance costs, you've got some vacancy built in there. And so we're gonna say your opex or operating expenses are 50k per year. Now the NOI right equals 120,000, 120,000 minus your operating expenses of 50k divided by your purchase price of 1 million. And when you divide, and then this equals 70K, when you divide 70k right by 1 million, that gives you 7%. And so your cap rate would be a 7% cap rate based on that purchase price, right? So that I hope makes sense. And let me pause here to see if there's any questions on that. Please throw some questions in the chat if you have any questions on this piece, and I will get to it a little bit later. But that seven percent is for an all-cash buyer and what you would earn in year one. Now you can compare it to another building down the street that may be trading at a five and a half cap or a six cap and see which one's producing more income relative to the price, right? Now, how to read cap rates. If you're at a three to five cap, it typically means that you're in a premium area, right? So three to five cap or three to five percent cap rate. It usually equals premium area. Uh, if you're talking about a multifamily, it's probably the top tier tenants and you're pricing in future appreciation. You believe that, hey, it's okay to be at a three to five cap right now because maybe this is a brand new built property. So I don't have a bunch of capex and it's in an awesome location where you're going to be able to have the the best of the best tenants, the doctors, you know, the medical device reps that are not buying a house yet but want to live in an apartment. This is where they're going. If you're looking at that six to eight percent cap, this typically means, right, it's a solid cash flow market, right? It's, you know, maybe a B class area. Maybe it's like when I first graduated college and I was in like a development program as an intern, right? I didn't go to the A class neighborhood. That cost too much. So I went to more of the B class neighborhood where it was safe. You know, I had the grocery store maybe a mile down the road, but it was more reasonable in pricing. And I stayed there and I did that for many years. And so that six to eight percent is a solid sweet spot for cash flowing markets. Atlanta, Dallas, and secondary markets can give you that. Even in this example, you can see that that seven cap that we just ran through. The one that we're actually gonna be closing on here, we just made it through due diligence last night on that million dollar fourplex is closer to an eight cap. It needs a little bit of work, right? As far as once these tenants move out, like we need to rip out carpet and all those things, but it's still a solid investment and it's cash flowing. And then when you start looking at nine plus caps, this is where you got to start asking a bit more questions, right? Like, why are they selling it if it's bringing in nine plus percent? Higher cash flow tends to mean a bit of higher risk, meaning the neighborhood may not be the best. So if you're not familiar with an area and it's trading at a nine cap, this is when I would start to hit the pause button and maybe go out there and go check it out, right? And really make sure that you're in the right location. Now, if you know the area or you're investing in your backyard and it's like a fringe market, like I feel very comfortable in Atlanta, having lived here for over five years now, investing on the fringe neighborhoods because I know, like, hey, you know, the belt line's getting finished over here. Okay, they got a Kava coming in here, they're building a food hall right here. They've got a bunch of, you know, mixed-use buildings that are planned and already budgeted and approved. And so I'm gonna invest on these fringe markets and we help clients do that. But when you start seeing nine plus cap, this is typically a C class area, and you're looking at more distressed and you're getting paid more to deal potentially with more headaches, right? So there's an important nuance. The higher the cap does not automatically make it a better deal. It usually reflects a little bit more risk, maybe a tougher tenant base, maybe some deferred maintenance, right? If you've got roofs and you know, HVAC units that are original, you know, $19.99 and are probably gonna need to get replaced here soon, then typically they will reflect that on the price until you'll get a higher cap rate. And it may mean some slower appreciation if you're not in the absolute, you know, best market. This is the reasoning why I do not lean on cap rates as much, right? It has nothing to do with, you know, the premium. What I'm looking at is I know the different neighborhoods, right, where I'm trying to invest, and I want to make my

Reading Cap Rates And Spotting Risk

SPEAKER_01 12:06

money work harder for me than I actually work, right? And the way to do that, in my opinion, is to focus more on the cash on cash return because what the cap rate does for a lot of the multifamily, especially for smaller multifamily, is it ignores your financing, which is the whole reason that real estate is so powerful in the first place. You can finance the majority of the purchase and keep the majority of the upside. That's pretty incredible. You can't do that elsewhere, right? It assumes you're paying all cash with all which almost nobody does, and it doesn't tell you what's actually hitting your bank account each year. It just tells you on paper, hey, this is the cap rate that somebody would pay. And for a one to four unit, the cap rate is largely irrelevant, right? This is still considered residential and it's valued based on the recent sales around those other properties. So that's why almost every conversation I have with the buyer, I pivot from cap rate more to cash on cash return. And we're gonna dive into what I mean by that right now. So I'm gonna erase this, okay? It's working so far, and we're gonna dive into cash on cash return. Cash on cash return. Okay, so what is cash on cash return? Cash on cash return answers a much simpler question, much more honest, and it's answering a question for every dollar I actually put into this deal. How many cents am I gonna get back in pure cash this year? Right. And so if I put in 100K and I get 12,000 back in this year's cash flow, that is a 12% cash on cash return. If I put 50K and I get 10K back, that's a 20% cash on cash return. And it's the most intuitive metric in real estate, and it's the one I lean on the most because if you have a solid cash on cash return and you're getting that consistently into your account, you can hang on to that property through the ups and downs, and you can hang on to it long enough to hit a market where it makes sense to sell it down the road for a lot more money because it tends to go up and to the right. Plus, this is how you're able to retire yourself early, right? Cap rates sound great, right? But a cap rate can go low very quickly just based on the market or the financing that that's coming out there, right? Cap rate is assuming somebody's paying all cash, which almost nobody does. And when you see for the like large multifamily world, when you see the interest rates go from being 5.9% before this war in Iran to, you know, when I recently checked earlier today, like 6.7, almost 7% again, that takes the whole win out of that large multifamily because again, people aren't paying cash like that. But cash on cash return still still exists. So when you look at cash on cash return, this is your annual pre-tax cash flow divided by the total cash invested. Okay. So I'm gonna give a couple examples. We're gonna work through another example. We're gonna talk about a long-term rental, right? And so with the long-term rental, let's call it a single family rental, you're gonna

Why Cash On Cash Matters More

SPEAKER_01 14:44

pay 300K. So purchase price, 300k. Your down payment, we're gonna say you're gonna put 25% down, which is still crazy to me. Most countries at minimum are asking you to put, you know, 40, 30, like a lot higher percent down. In the US, we have it pretty good at being able to put down, you know, the minimal. And then let's say closing cost, which we're really good at negotiating, negotiating, but let's just say there's closing costs of 15K, and this includes some rehab, closing costs and light rehab. And so all in, you have 90K into the deal, right? 90K and your purchase price was 300K. Let's say the gross annual rent is 22 or the gross, yeah, the gross monthly rent is 2200 and the annual rent is 26,400. Now, after you factor out the operating costs, let's say your net operating income equals 18,000 and your mortgage, let's say the the mortgage that you're paying, right, is 7200. And that's not even going to get included in this piece, but we're gonna say the mortgage that you're paying for your annual mortgage payment, P I P and I, is 7,200. And then your annual pre-tax cash flow, meaning the money that you're taking home, equals 10,800. And please excuse my chicken scratch. This equals a 12% cash on cash return. I worked through the math earlier, thankfully. But this equals a 12% cash on cash return because what you're doing is you're gonna take your annual pre-tax cash flow of 10,800 and you're gonna divide it by how much you have invested, which is 90K. Now notice you're not dividing it by 315k because you're able to leverage the rest of that real estate. You're just dividing it by the 90K that you actually put in to see what your cash on cash return is. And in this scenario, it equals 12%, which is already beating the stock market and helping you, and that's even before you get the other benefits of appreciation, principal pay down, and the tax benefits as well. One other example I wanted to work through is a short-term rental, right? For a short-term rental, we're going to say we're gonna have a purchase price of 300k. We're gonna have the closing cost plus furnishing be at about 35k. This would be a smaller short-term rental, and then down payment is gonna be 75K. So, all in, we're gonna put 110K all in, all in. And then the gross annual revenue that you pull from this property is gonna be 72K. 72,000 is the gross annual. Now you have a lot more cost from an operating standpoint, right? You've got cleaning cost, you've got you know, lawn maintenance, you've got the actual maintenance of the property. And so we're gonna put that at 30k, which is gonna bring you down to 42k of net operating income. And so now when you look at the pre-tax cash flow, because we're still gonna have to take out, you know, the annual mortgage of about 7200, the pre-tax cash flow is 34,800 divided by 110k all in. This equals a 31.6% cash on cash return. And this is how you can quickly start to have your dollars working very hard for you at a 31% cash on cash return, essentially in a little over three years, you would have recouped the down payment that you put in. And now the other 27 years of that mortgage and having that property is gravy for you. And the cool thing about short-term rentals that I discovered by getting into it five years ago is that you also get additional tax benefits. And so on this $300,000 property, you could do something called a bonus depreciation or cost segregation bonus depreciation, right? And essentially what that allows you to do is instead of taking all of that depreciation over 27 years, like 127th every year, you can take it all in year one and you can take that off of even your W-2 income, right? You don't have to be a real estate professional to do this. It's called the short-term rental tax loophole. I'm gonna do a couple of videos on that in the future. But long story short, I've done four of these to date, and it's roughly about 23% or 0.23, 23% of the purchase price is roughly what you get back in tax benefits. And so if I do the math on that, 23%, that's $69,000, right? That you would have removed from your taxable income. So in a year that say you made, you know, $200K or $150K, this could drop you down to below to another tax bracket and allow you to have even less taxable income from Uncle Sam and maybe save you even more from a standpoint of not having to pay taxes if you buy a big enough house. And so what I started to learn is like, hey, if I'm gonna be writing a six-figure check for taxes, why not put that six-figure check toward a property that's going to give that back to me in a down payment? Because when you look at this, right, your down payment was 75K, you're saving 69K. You essentially paid 6K for a down payment. That's pretty cool, man. That's actually pretty awesome. And so let me pull this up here. Okay, this is a great question. So we have a question. I'm gonna answer this live here. So when you talk about, and here was the question: how does a cost segregation impact you when you go to sell the property? So this is super important. You should not do bonus depreciation cost segregation on a property that you plan to sell within the next two years, in my opinion, because you're capturing all this depreciation up front. And on the back end, you've got to give that back. It's going to be taxable on the back end for the property at that property's tax rate. If you do the regular depreciation where you take it over 27 years, it still is paid back, but it's a lot less because you only got, say, like three years in, four years in, five years in. I only do this on properties that I plan to keep for a while. And the short-term rentals that I'm doing this on are ones that I plan to have in my portfolio for a good amount of time. For example, one of the ones I did this on was I was able to buy a fourplex up in Snellville, very close to this other fourplex we're helping these other guys buy. And I turned two of the units into short-term rentals because it didn't make sense on paper, at least initially, to have them all as long-term rentals. So that brought in the cash flow, it ended up paying for itself, and it allowed me because I had half of it as a short-term rental, to do a cost segregation bonus depreciation on it. Now I bought this three years ago for 800K, right? And at the time, that essentially wiped out like 190K of taxable income, right? Which is incredible, right? And so I plan to keep that for a long time. You don't have to keep it as a short-term

Short-Term Rentals And Bonus Depreciation

SPEAKER_01 20:34

rental either. I actually converted one of those units back to a long-term rental and moved that furniture to another property. And I plan to convert the last one as well within the next year or so because rents just continue to increase, and now it does make sense. So this is just having tools in your tool bag. And so circling back to my target returns. This is just for me. For long-term rentals, I'm typically targeting a 12% cash on cash return. Anything less than that, and you're not really beating an index fund. I still invest in index funds and I just keep that going because it's crazy what the stock market can do over time as well. But real estate is where I take my big swings because I feel like I understand it a lot more. And then for short-term rentals, I go for a minimum of 15% cash on cash return. And that's only if it's an A plus property and an A plus area and really not many CapEx, but I'm typically shooting for you know 20% plus for our clients to go from there. And then a midterm rental, which would be like a furnished rental where you're helping out nurses or traveling professionals, you're usually somewhere in between that, maybe like 15, you know, 18, 16%, and kind of go from there. Remember that cash on cash is just year one, right? This is the part that most beginners forget or don't know about. The cash on cash numbers that you're calculating is at the purchase, and it's a snapshot of year one. Every every year after that, you're raising the rent while your mortgage payment stays exactly the same. This means that your cash flow actually grows. And so I love looking at opportunities like that Snellville property. When I purchased it for 800K, the total amount. Was bringing in was six thousand dollars per month or fifteen hundred per unit. The median rent for the area for a renovated unit was two grand, and so it was well underrented. The reason it was underrented is the previous owners bought it a decade before, back in 2013. They bought it for like 150k before Snellville was even, you know, developed, before there was a Chick-fil-A, you know, within sight of the of the unit. That's when they bought it. And so they were making cash hand over fist. They had the same tenants in there for seven plus years, and they weren't trying to change anything. We took over. I immediately gave notices to two of the tenants. We updated those two units, turned into short-term rentals to cover the delta for all the units, right? And we've steadily increased the rents of the other two units, and those get tenants have stayed because you know, a hundred dollar increase this year, a hundred dollar increase next year, that's not going to warrant you moving out and going to go find another place and incurring all that expense. And so we slowly increase their rent and get them up to market while we had the short terms, and now it makes sense to switch those over, which we have. And so keep in mind that that's just for year one. That's what I'm shooting for year one. But every subsequent year, it only gets better, right? It just builds on itself. And so when you look at, let me erase this board again. I do forget some of the tools that I have at times, so bear with me.

Cost Seg When You Sell Later

SPEAKER_01 23:10

So when you look at cap rate versus cash on cash return, right? Cap rate versus cash on cash. So cap rate measures a property's yield, right? Properties yield not including financing and cash on cash return, it measures your actual return return on cash invested. Cap rate does not include the mortgage, right? Whereas cash and cash return does include the mortgage. Cap rate is best used for measuring properties that are more commercial, right? Like uh office space or you know, self-storage or a five plus unit multifamily where you're going to be getting commercial financing or pulling a bunch of people together to finance it. And the cash on cash return is better for deciding if the deal works for you, right? And for residential. And residential is anything from a single family up to a four-unit property, you and residential. Cap rate assumes an all-cash purchase and cash on cash return, it reflects the real world of finance purchase. When you talk about cap rate, it does not capture the leverage benefit because it's assuming cash. Cash on cash return does capture the leverage benefit. And when you talk about targets, my target, you know, market dependent is if I'm looking at the cap rate for a commercial property, is about seven percent, you know, or more would be awesome. It's been a lot tighter of recent, but seven percent. And then when I'm looking on cash on cash return, I'm looking for 12% as a long-term rental where you set it and forget it. I'm looking for 20 plus percent as a short-term rental where I'm gonna be actively managing it with my team. And so there's five common mistakes that I see. And we're gonna wrap up with this, right? Five common mistakes, and I'll give you a couple key takeaways. Forgetting closing costs and rehab in your cash invested.

Targets, Common Mistakes, And Closing

SPEAKER_01 24:44

You have to include that. It's not just the down payment. You got to include the closing costs and rehab and/or furnishing if it's gonna be a short-term rental. You need to have some funds to decide for that. We've got some creative ways of using funds to do that and getting the seller to help us pay for a portion of that, but you still got to calculate that in. If you only divide by the down payment, you're gonna inflate your cash on cash return and you're gonna end up disappointed at the end of the day. Number two, underestimating vacancy and capex. We typically budget at least five percent for vacancy, right? And we usually do three percent for capex because we either negotiate all the major items up front or we know what we're going into and we get it replaced up front so that we don't have issues. CapEx includes things like the roof, HVAC, water heater that are all gonna come due eventually and need to get replaced. Number three, using the gross rent instead of the net operating income. Operating expenses on a single family can typically eat between 30 and 40 percent of the gross rent before the mortgage is due. And on a multifamily, you want to plan for 40 to 50 percent because there's just a lot more other stuff that you're responsible for on a multifamily that can pop up. When you talk about comparing cap rates across different markets, a nine cap in a rough market isn't the same as a six cap in a growth market, right? The risk profile is completely different, and at times, like I would leave those nine caps alone, especially if you're newer to the game or if you're not investing in your backyard, I would shoot more for the six cap, right? And make sure it's in the awesome area with your realtors and things that nature. Number four, ignoring how short-term rental revenue can be seasonal. And I say can be because a lot of people like investing in vacation markets, and we help with that. Like we have an investor right now who's looking to buy in Blue Ridge. We've helped like 10, 15 people buying Blue Ridge and buy properties that are awesome, but it tends to be seasonal, right? And so there's gonna be a down season where you're gonna either need to reduce price to get people in or just you know, be prepared for it and have that vacancy baked in. And so I like personally investing in areas like the Atlanta Metro, even with short-term rentals, because you get all types of travelers. It's not just people coming for vacation, but it's people coming for business, people coming for family reunions, and you know, but six and a half million people here in all the different events that take place. There's always a need for housing. And when I go to sell it on the back end, I'm not selling it to somebody who's buying a second house, I'm selling it to someone who is more than likely going to move in. And retail buyers tend to pay more for houses. And the final tip, I would say, or common mistake, is falling in love with a property before the numbers say yes. I have made this mistake two times and I regret it both times. Now it worked out in the end because I held on long enough, but my goodness, if the numbers do not work, just say no, right? With our clients to avoid this, we use a phase one and phase two approach to underwriting. And in phase one, we're literally just narrowing it down from say a thousand properties to hey, these are the 10 that make the most sense number wise. And then we dive deeper into it once we can get one of those 10 under contract. When we say, okay, we like the picture in this one, let's go get it. Then we dive deeper and during due diligence, we negotiate heavy and run the detailed numbers to plug everything in and make sure it still makes sense when we can still walk away. And so that's a way to kind of take off the rose-colored glasses and see if it actually works. Now, five takeaways from this webinar. The first is that the benchmark for the stock market's typically eight to 10% with your real estate deals, you want to beat that with your cash on cash return. Cap rates compare buildings, cash on cash compares deals, right? Number three, cash on cash is the most intuitive and most honest metric because it measures the cash in versus the cash out, right? It's how much that I put into this deal and what am I getting out of it in year one, and that can only get better from there as long as you run your numbers right. Number four, you want to target, at least we target 12% cash on cash for long-term rentals annually. And for short-term rentals, we want to get 20 plus percent, but minimum 15. And then keep in mind that cash on cash is just year one. It doesn't account for rent growth, leverage, appreciation, tax benefits, all those other things stack on top. And so I appreciate you all for joining. If you need help or want help running these numbers on a specific deal, or if you'd like to see real underwriting on properties that we're looking at for clients in Georgia, Florida, or Texas, please don't hesitate to reach out to myself or the Acava home team. We help investors house hack their first property, build short-term rental portfolios, midterm rentals. We're buying small multifamilies, larger multifamilies, and the math is the same at every level. The targets are non-negotiable, and we're here to help you make sure that you get an investment that you're going to be happy and proud of down the road. And so I'll pause for a second to see if there's any more questions. And with that in mind, I appreciate you guys. I will catch you a little bit later.

SPEAKER_00 29:17

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