What’s Your Cash Earning If You Buy A Duplex?

duplex cash on cash returnA lot of duplex investors come to me looking to find a duplex with a big CAP rate. After all, the bigger the CAP, the better the return on your investment, right?

While this is certainly true, a CAP rate is not the best measure of a duplex. The reason for this is simple: the purchase price per unit is often higher than it is, say, with a 20 unit apartment complex, and yet, the duplex and the apartment rent for similar rates.

Generally speaking, the apartment building generates the greater return according to the cap rate.

When a duplex owner goes to sell, however, they have a big advantage over an apartment building owner. Thanks to financing options that require lower down payments, there are more buyers for duplexes than there are apartment buildings. This drives values up.

At the height of the real estate market, this meant very few duplexes had a cap rate greater than 2.

In my opinion, this makes the cash on cash return an investor receives from a duplex a better measure of value.

What’s cash on cash return?

Like a CAP rate, cash on cash return is simply a way to compare one potential duplex investment to another. Simply put, it’s the amount of cash left over after you’ve paid all of a duplex’s expenses (cash flow), divided by your down payment.

If you put $20,000 down on a purchase of a $100,000 duplex, for example, and that duplex had a positive cash flow of $2000 a year, your down payment would be earning a 10 percent cash on cash return.

Compare this return to the amount of interest your money would earn in a savings account.

On the other hand, if the duplex you were considering buying a duplex with a negative cash flow of $2000 a year, you would would be earning a -10 percent on your down payment.

Measures like CAP rate and cash on cash return are ways of not only comparing one potential duplex investment with another, but also of making sure your money is working as hard for you as it possibly can.