Have you been calculating the cash on cash wrong this entire time?!
Anthony was recently asked, with deals that we’ve taken to refinance, are we calculating the refi into the cash on cash return? The answer is no… and if you have been doing that, you’ve been calculating the COC WRONG! Why?
Find out on this week’s episode of Multifamily Investing Made Simple, In Under 1o Minutes.
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Tweetable Quotes:
“At the most fundamental level, if the math’s not right now, then when there’s actually money being involved and coming back, like, what’s the chance that they’re gonna get it right then.” -Anthony Vicino
“Specifically on cash on cash, you wanna make sure that they’re actually doing the math right.” – Dan Krueger
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** Transcripts
[00:00:00] Hello and
[00:00:14] Anthony: multifamily investing made simple. This is the podcast that is all about taking the complexity out of real estate investing so that you take action today. I’m your host, Anthony casino of this capital joined as always
by Dan.
Insert nickname, Kruger. Mm.
[00:00:31] Dan: Webinar Kruger. How about that? Hot off a webinar, hot off a webinar. Ooh. Feeling good, feeling fresh. I mean, I’m, I feel like I’m, I’m in my webinar. Head space. So this might be a little bit more webinar than podcasting.
[00:00:42] Anthony: I need you to bring, I need you to bring that, that good, good energy.
Plus that is, this is a short episode. Okay. So I had for like 10 minutes, but, uh, today let’s keep this one short and sweet. I think this is a, I gotta question the other day from a prospective investor, they were looking at our historical returns, uh, spreadsheet where we lay out all the deals that we’ve ever done, [00:01:00] how they perform quarter by quarter.
Um, and his question was on the deals that we’ve taken to refinance. Are we calculating the refinance into the cash on cash return. And so the, the, the title of this podcast episode is, Hey, you’re probably calculating your cash on cash return wrong. Oh. Um, because I’ve seen a lot of operators do this, where they calculate it wrong.
So Dan, answer the question for me. Um, do we calculate the refinance into our cash on cash return? And then let’s unpack why it’s wrong. Answer.
[00:01:34] Dan: Is no, we do not. So it sounds like from what this guy, or from what you said, this guy had previously seen other operators doing that and was wondering if we were doing the same.
Is that the context?
[00:01:44] Anthony: I don’t know if he had seen other people doing it. I know I’ve seen other people doing it where you’ll see, like in years, one and two cash on cash return of like five, 6%. And then the cash out refinance happens in year three and suddenly that cash out cash returns like 22% [00:02:00] in year four.
It’s like 25%. And. Yeah, well, that’s a really big
[00:02:03] Dan: jump. Yeah. I think it’s always, uh, wise for you to check the math. When you’re looking at somebody’s pro perform, cuz you usually see a fairly simple table of some numbers and you wanna make sure that you can, uh, reverse engineer the percentage rate of return that you’re seeing.
So specifically on cash on cash, you wanna make sure that they’re actually doing the math, right? Because the proper way of doing this is let’s say you have a hundred thousand dollars that you invested into a deal. And in year one you got $7,000. About a 7% cash on cash return, uh, rated return. And then in year two, you got a distribution of $10,000.
Great. That’s a $10,000, uh, cash on cash return there for that year, but they also did a refi and they sent you $50,000 back in that. If you see them counting that as a 60% cash on cash return, meaning 50,000 from the refi plus the 10,000 of cash flow equals 60,000. Dividing that by the a hundred thousand you put in and calling that a 60% cash on cash [00:03:00] return right there as in entirely bro, uh, a cash out refinance is a return of your capital.
Not a return on your capital. And so unless
[00:03:09] Anthony: it’s worded, unless it’s worded that way specifically in the contract, which it might, but don’t do those deals and that’s more
[00:03:14] Dan: of a tax thing. Anyways, it’s still an incorrect way of calculating the metric cash and cash return. Now, whether or not a refi is, is returning on capital or of capital, that that could be, uh, changed.
But again, that’s more of a tax thing. Cash on cash is gonna be looking at the return on your capital invested. So whatever the balance is of your capital account, um, Whatever amount of money you receive from the deal, divide that by whatever’s in your capital account. And that is your cash on cash return.
[00:03:42] Anthony: So now after the cash shot, refinance occurs your cash balance and your capital account will reduce probably let’s say you invested a hundred thousand and 50% of that gets returned in the refinance. That means your capital account went from being a hundred thousand because that’s what your initial in investment.
But now we return 50,000 of it. So your capital account’s actually now [00:04:00] $50,000. And that new number is what’s your, your cash on cash is gonna be calculated based off of, and it’s the same for your preferred return. If there was a deal that was offering a 7% preferred return, then when you were getting a hundred thousand dollars, uh, when you invested a hundred thousand, when that was your capital account, you would expect a yearly, uh, return of around $7,000 to hit that 7%.
Right. But if the capital account is only 50,000, that’s what the 7% is now calculated off of. So that number it, while the percentage stays the same, the total number that you’re receiving is gonna be a little bit less. Yeah. Now I, I, I, as you were talking about this, I remembered where I saw this. Re very recently.
In fact, I had an in, um, a student that I coached for Jake and Geno. He came to me with a deal that, um, somebody had presented to him and we were going through the numbers and in the numbers, they had calculated the, the refinance into the cash on cash return. And I said, listen, like, unless if they never do a deal with somebody who can’t get the math.[00:05:00]
Like, yeah. At the most fundamental level, if the math’s not right now, then when there’s actually money being involved and coming back, like, what’s the chance that they’re gonna get it right then. So as they don’t know the equations, they don’t know how to calculate it correctly from the beginning. Like, don’t do that deal.
And I see this, I see this more often than I should. So I thought this would be a good public service announcement. Just make sure you will see probably after a refinance that the cash on cash return percentage we’ll bump up a couple percent. That’s. . But if that thing jumps up by 10, 20, 30%, um, something probably pretty crazy is been happening there.
Yeah.
[00:05:34] Dan: Yeah. I think the takeaway from this episode should be, uh, you guys understand exactly what the cash on cash return ought to be calculating. And then, uh, you don’t need to be a, a math genius. Just ask your operator to tell them how are you doing the math on the, on these metrics? Explain to me.
Divided by what equals X percent per year per your deck, and have them explain to you. And if they’re doing it a different way, then like Anthony said, maybe walk away cuz uh, if they don’t [00:06:00] understand that simple math, then there’s probably something else they’re about to screw up to mm-hmm
[00:06:03] Anthony: right. So that’s today’s episode guys and gals, hopefully it brought you a little bit of value and if it did, if it brought you even just a SCO, just a Scotia value, then you should drop what you’re doing right now.
Um, if you’re driving a car, you should pull over. If you’re on the treadmill, you should. And you should get onto iTunes or Spotify or wherever you’re listening to this, and you should leave a review, uh, rating. It helps a lot with the algorithms help spread the word and listen, we brought you a Scotia value.
So you, you owe us. um, actually you don’t and you come to think about S nothing. So just giving us your time and your ears and your attention is all the, all the things we need. We appreciate you being here. Thank you. Thank you. Thank you. We’ll see guys in the next episode.
