How Investors Think

Cash flow, cash on cash analysis, and net income might not be everyday terms unless you’re an investor.

The basics of any real estate investor are to accomplish one main goal: make money!

To ensure the investment will do just that, make money, the investor may do some analyzing to determine the best investment, how much money to put down, should they pay cash, and so on. These analysis tools have become imperative in these comparisons, so let’s go over them.

A Cash Flow Analysis

A cash flow analysis is a formula of taking the net operating income of the property, minus the expenses and debt service, to calculate the cash flow. It can quickly tell you if a property is making money or losing money, based on current income and expenses. These expenses include debt (sometimes we call mortgage), property taxes, insurance, and so on. If you don’t have a spreadsheet to help you with these evaluations, it’s imperative if you’re working with investors. You can find an easy-to-use one here.

Cash on Cash Return

The cash-on-cash return is a way to determine how long it will take to get a return on the money an investor paid for the property, their down payment, or the entire cash out of pocket. This tool can help an investor decide which of the options they have to choose from will give them the best bang for their buck. For instance, this spreadsheet can help them decide if it’s best to pay all cash or put down a smaller down payment and finance the rest. This is a great starting point as a measuring tool. You can find the cash on cash return worksheet here.

As with any investment, the investor should be directed to consult their attorney, accountant, and lender as well.

Don’t forget, some investors, silly as it may seem, don’t mind losing money on paper. That’s because they may gain more in tax benefits from the IRS, but that discussion should always be left up to the accountant and the investor. If you want a great book recommendation to help you learn about tax strategies for real estate investors, this is definitely the book!

Every investor will have different reasoning and methods to their investing, but these spreadsheets can help you understand and educate the investor on their decisions.

Want to learn more?

Why not start on the path of real estate investing? The High Heels Landlord might be a great way to start!

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