I’ve read some posts in this forum where it was said that cash flow is more important than ROI, but wouldn’t the annual return you get on your down payment for a property (ROI) and the cash flow you receive from it’s rents be considered much the same thing?
Thanks,
Rich
Pretty much, but not exactly. Investors, and especially accountants, love using technical terms like cash on cash return, return on investment, rate of return, internal rate of return, annual percentage yield, cashflow (or more appropriately positive cashflow), net profit, gross profit … some terms have the exact same meanings, and some terms have slightly different variations on their meaning … but in the end they all NEARLY mean the same thing - which is:
Are you making money? Or not?
And how FAST are you making your money back?
Hopefully that helps.
The more sophisticated of a investor you become, the more important it will be to know exactly what is what. But don’t over complicate things, especially when you are first starting out.
I personally like to calculate ALL of my investments - real estate and otherwise - based on annual percentage yield, or APY, which is a normalized representation of an interest rate based on a compounding period of one year. All I have to do is whip out my HP-12C financial calculator (assuming I don’t do it in my head), and figure my APY and seconds, and I know whether it’s a good investment or not. Nice & easy.
Cash flow is monthly dollars going into your wallet.
ROI is a percentage based on dollars going into your wallet annually vs. Dollars that came out of YOUR wallet upfront.
They are related, but very different.
I use both in my calculations.
If you get 100% financing ROI is infinity.
The more you put down the higher you will cashflow(less mortgage pmnt), but your ROI will go down.
I recomend you reading a bit. This is an oversimplified answer.
Thanks for the replies,
I can see where the down payment amount would affect ROI and cash flow differently. Currently, I’m planning on using my HELOC for down payment. (This met with different reactions in a recent post I made.) If I do that, I probably should be most concerned with cash flow, since with no out of pocket, upfront payment, ROI would be infinity and probably have less meaning to me.
The main reason for considering this purchase at all is to have greater control over the building I’ve been renting for my business for many years.
Do you have any recommendations for reading?
Thanks,
Rich
cashflow is always more important than ROI or income. Unless you don’t need the cash.
without cash you’re not in business very long.
Cash flow (recurring income after expenses) is the reason you are and can stay in business. It’s what pays the bills and makes it worth it to you to do what you’re doing. For example I have a rental property that cash flows $300 a month. That’s great to me.
I would use ROI to measure how each of my investments compare to each other and to new deals I want to do. So if I cash flow $300 a month what did I give up to get this cash flow? If I put the same amount in another investment what would it do?
It’s helpful to calculate ROI but Cash flow is more important.
just posted an example on my facebook page why cashflow is more important than income.
It’s highly recommended to achieve cash flow first. If you have your cash flow situation set you can go for flips which despite having more risk you can also increase your annualized return.