Investment metrics
Cash Flow: The amount of money the property makes in rent (income) over and above the amount of money it costs every month to operate the rental (expenses)
Income - Expenses = Cash Flow
Cash on Cash Return: The income return as a percentage of your total investment upfront.
Cash on Cash Return = (Annual before tax cash flow) / (total cash invested)
For example… If you made $2500/mo in cash flow, this would be $30,000 annually. If you invested $400,000 total to acquire and reposition this income stream, your cash on cash return would be
= $30,000 / $400,000 or roughly 7.5% cash on cash return.
You can use this napkin test to understand if this is a good use of your cash on hand. Ask yourself, what is my money worth in a bank? What is my money worth in the stock market? What is my liquidity worth?
The answers to the questions above relate back to your goals & expectations.