It seems like everyone has an opinion about what you should invest in. As soon as you have a bit of extra income or an excellent return on another venture, other people are eager to spend it for you. But you already know that your highest return won’t happen on stocks, bonds, or funds. And you might be surprised to learn that it won’t even happen on the single family rental properties you hold in your portfolio? So what is your best investment when you’re looking for the highest return?
Let’s talk about cash-on-cash returns. That’s the ratio of annual pre-tax cash flow compared with the total amount of cash you’ve invested. While not the only factor to consider when analyzing investment opportunities, your cash-on-cash return is an excellent metric to determine if an investment is profitable.
Cash-on-cash is valuable in situations where cash flow is the goal.
Here’s an example of how to calculate cash on cash returns:
Consider a 10 unit property is purchased for $1,000,000, and you put up a down payment of $200,000. Assume your monthly net cash flow is $8,000; or $96,000 annually. Now, debt repayments are factored in. Assuming that you’re paying $6,000 per month ($72,000 annually). The cash-on-cash figure is then calculated as 96,000 minus 72,000 (24,000), then divided by your original investment of $200,000. That’s 12%.
So how does that affect your decision?
Comparing Asset Classes
Stocks: According to brilliant investors like Warren Buffett, seven percent is a good return annually from stocks. Assuming a balanced portfolio invested long-term, that is. Short term investments are too volatile to be factored in, and investing in a single product is also too risky to consider as well.
Seven percent isn’t bad. It’s respectable, and thousands of regular investors would be happy to see seven percent increases year over year. But that’s not where the best return for your cash investment lies.
Single family homes: Rental properties are popular. Vacancy rates are at an incredibly low point currently at around the seven percent mark. It seems if you have a single family home that you want to rent out, there is a tenant who wants to live in it. Rental homes are relatively steady investment, but what about if you have a vacancy? The biggest risk lies in the possibility of zero income in any months where you do not have a tenant.
How do single family properties perform as far as cash-on cash return is concerned? Well, an industry average seems to be around the ten percent mark, which is a fairly steady return for a modest investor.
But how do you determine if the benefits outweigh the risks? The key there is in the question itself. If you have to ask, is it really the investment that is going to give you the highest return? Probably not.
Mobile Home Parks: First, consider the asset itself. Mobile home parks are very stable. Even if you have a vacancy rate of seven percent that means your mobile home park is still 93 percent full. It’s not an all-or-nothing game like a single family home. Your cash flow is usually positive.
Next, take into account the structure of a mobile home park. Essentially, as a landlord, you rent out parcels of land to the tenant. It’s only a plot with the infrastructure for the tenant to connect to. You are not responsible for home maintenance and repairs unlike a rental home. Your annual maintenance costs are incredibly low as it’s only the infrastructure you are responsible to maintain.
Also factor in the low rent cost for the tenant. As a low-cost option for housing, mobile home parks provide an in-demand service to very stable tenants – tenants who are proud to own their own home and want to stay in the park.
How Do Mobile Home Parks Perform?
Get ready for the big news… mobile home parks are an outstanding investment. Conservative numbers suggest that investors can expect a projected cash on cash return of 15 percent all the way up, even as much as 40 percent! There is no other asset class that provides the financial security and cash flow that mobile home parks provides.
What does that mean for you? Well, that means everything. Safety. Security. Confidence. Early retirement. That means for every dollar you invest is paying you up 15 percent and even up to 40 percent in returns annually. Imagine the freedom such a cash flow could bring.
You could invest your money in a stock and be satisfied with seven percent… if you get that return in a volatile market. You could invest your money in the popular single family residence market and expect a reward of ten percent… if you have a tenant and keep your maintenance costs down. Or, you could invest your capital into an asset that outclasses all others. Invest in Mobile Home Parks, and be rewarded with a cash-on-cash returns that are unmatched.