Tailwind Talks
Tailwind Talks is a podcast for high-performing professionals who want to build serious real estate portfolios without leaving their careers. Hosted by an airline and military pilot turned investor, it dives into actionable strategies for scaling your real estate portfolio while balancing the demands of a full-time job.
Tailwind Talks
Your Down Payment's Best Friend: Measuring Real Estate Success
Ever wondered what separates successful real estate investors from those constantly feeding money into their properties? The answer might be simpler than you think.
Cash on cash return stands as the ultimate metric for measuring real estate investment success. It cuts through the noise of speculative appreciation and trendy market predictions to reveal what truly matters - how much money your property generates compared to what you put in. When you're considering tying up hundreds of thousands of dollars in a deal, this straightforward calculation tells you exactly what return you're getting on your investment.
While many investors get seduced by appreciation potential or recent rent growth trends, these factors don't guarantee future performance. The podcast host targets 15-25% cash on cash returns, with 20% providing enough buffer to withstand unexpected expenses without requiring additional capital contributions. In today's challenging market, finding properties yielding 25% has become increasingly rare, making 15% a more realistic target for most investors.
Property taxes represent a particularly insidious expense that often increases dramatically after purchase. Many investors calculate returns using current tax assessments without considering potential 20-40% increases that can devastate cash flow projections. Unlike rent increases, which face market limitations, property tax hikes are virtually guaranteed in most markets.
Ready to transform your real estate investment approach? Start evaluating properties based on actual cash performance rather than speculative future gains. Your investment dollars - and your financial future - will thank you. Share your thoughts on cash on cash return targets in the comments below!
What's up everybody, welcome back. Today's episode is all about cash on cash return. It's the only thing I think that matters and that's what we're going to talk about. So the idea cash on cash return how much money did I put in the property, aka my down payment generally, and how much money am I going to get back out as far as what I'm getting after? Everything is excluded. So that means rent comes in, taxes come out, property management comes out, utilities come out, maintenance comes out, all that stuff comes out. Whatever that number is left at the end, how does that look compared to what I put down, usually looked at year by year? So how much money do I bring in a year versus how much money did I put down? What's that ratio? Is that 10%? So in that case, that means you're getting $10,000 a year versus $100,000 down. Is it more, is it less? What is a good number For me? I think 20% has always been my sweet spot. I know that I can withstand some issues and still at least break even. I'm not going to be feeding it, and feeding it just means giving it more money to stay afloat. So that's something that's important to me, because I don't really want to feed those properties. I'd rather the money that I'm making from my job flying full-time. I'd rather that money go into buying more property so I can just continue to make this thing grow. That's what's really important to me.
Speaker 0:A lot of people they factor in oh, this property is going to appreciate. Man, this area has been hot, it's going to appreciate, is it, though? Does anybody know? Do they know? They don't know Appreciation you can throw that out the window. Oh, rent, last three years, rent's gone up 12% a year or 15% a year. Okay, how long is that going to go for? Have people's wages gone up to the commensurate amount? No, so how long does that go for? Does that go forever? And maybe it will, and I'm sure I'll be proven wrong many times, but when I'm factoring this stuff into my math of whether or not I'm going to put down potentially hundreds of thousands of dollars into a deal, I'm not going to sit there and say, man, rent from 2020 to 2023 was just going off the chain. It's going to continue into the future.
Speaker 0:That's like a fallacy that a lot of people come into and that's just not. That's usually not reality. So 2020 was a wild time and a lot of cash got infused into the market and caused things to go weird, and people just expect that's just going to go forever. So it's not. But I can tell you one thing that will go up is probably your property taxes. You might go into this deal.
Speaker 0:In this deal that we talked about earlier today, 133 a month in taxes is what we're paying right now. But when we buy this property, is it going to stay there? No, last year I had so many properties that went up 20, 30, 40% in their assessment, which means my taxes are going to go up next year by that amount and not by that amount necessarily, but by that percentage. And then they do a whole mill rate and this, and that I don't really know how it all works. I just don't mean that it's going to cost me more money. So it's pretty simple in my eyes.
Speaker 0:So all these things that people factor in to try to justify a property's value increase down the road doesn't actually change what you're making per month. The only thing that would change, maybe, is if you got higher rents and there are cases where there are under market rents I'm not saying that there's not, but if the property is near market and your only hope of making cash is that the market continues to go up and you can raise rents next year. You're putting yourself in a precarious spot because if it doesn't happen now, you're feeding it, and that's okay. Honestly, I don't think that's the worst idea sometimes if you have a property that you really want to bet on long-term, but when you're starting out, you don't need a property that you're going to feed. You don't need another headache. You need something that's going to actually produce for you, whether that's equity rent or both, ideally and that's really the situation you want to find. You want to find a property that at Even for me 63 units what we're actually seeing after all of our expenses, is not enough that any of us would really want to or could quit our jobs. But the money that is really significant and has changed all of our lives for the better is the equity side of it, and that's where we've seen hundreds of thousands, if not millions, of dollars in appreciation. Now, what does that really mean? It's tough, because the appreciation number you have to factor in inflation and if you're looking at a property and say, in 2018, it was 160,000 and now it's 320,000. In that time, how much inflation has occurred, and you really can't. You can't compare them. They're apples and oranges. So I think that's where a lot of these issues come into play and that's why I don't look at any of that.
Speaker 0:I look on cash on cash. Once my money is tied up in that deal, I'm paying back with it with cheaper, inflated dollars as time goes on, and so to me, the metric of cash on cash seems like just the simplest and easiest way to know if a property is producing, and that's how any business would operate how much money did I put in versus how much money I'm getting out? So people in real estate try to get really weird with the way that they connive their way through these deals, and I think that's insanity. It puts people in really bad positions because people get sold deals that are terrible and they end up paying for them because they're like you know what, down the road I trust this guy Down the road, this is going to be worth more and they end up getting bit in the ass. So keep that in mind when you're looking at a property.
Speaker 0:Cash on cash return is key, I would say. For me, I'm looking at anywhere between probably 15 and 25%. Cash on cash is like probably the golden zone, and these days you're probably looking more towards that 15%. Finding something that's spinning off 25% cash on cash is hard to do. So again, quick lesson, something that not even a lesson I hate calling it a lesson because I don't even know what I'm doing but a quick kind of thought to move forward with and maybe it benefits you, maybe it doesn't, but, as always, appreciate you guys, anybody that's listening and watching this, I really appreciate it.
Speaker 0:I'm going to continue to put these out, just quick little segments and then eventually move into some more longer form content. Any comments? With video, lighting, audio, whatever it is? Let me know and I say that because in the middle of this my light like literally died my fill light. So I am literally making this up as I go. I've got my iPhone mounted on a cardboard box right now, so this is about as about as wild as it gets. So let me know, I'll try to do my best to improve in the future and we'll talk to you soon. Thanks.