When I was a kid, every now and then my parents would say, “let’s go for a drive”.
They never seemed to have a specific destination in mind. They’d just load us all in the station wagon and take off.
Gas was cheap, so I think it was their idea of inexpensive family fun.
Of course, nobody can afford to do that today.
Every now and then, some of the real estate “investors” who call me on the phone remind me of my parents in those early days.
They don’t seem to have a particular plan or destination.
For instance, when I ask them what kind of cash on cash return they want on their money, I am greeted with silence.
This is usually because they have no idea what I’m talking about.
Cash on cash return is simply the amount of money you take out of a duplex investment every year compared to the amount you put in.
For example, if a duplex has a positive cash flow of $5000 a year, and your down payment on it was $50,000, then your money is earning a 10 percent cash on cash return. (5000/50,000 = .10 or ten percent).
Now, if that same $50,000 was earning $10,000 a year in some other type of investment, like stocks, a money market account, or business investment, it would be earning a 20 percent cash on cash return.
So why would you ever move it into something that makes you less?
Conversely, if that money’s generating a lowly 2 percent return for you in a savings account, why on earth would you leave it there?
What’s your ideal return on your money– provided there’s not too much risk?
If you know that before you begin, you’ll never end up financially lost.