WCC 12: Cash on cash return, return of cash…..how do I measure success

Hello. Good morning everyone. Welcome to another coffee and a chat. There we go there, how’s that? Hi, good morning. Jason Whitton here for another coffee and a chat. Welcome, do the quick intros while the Facebook Live is warming up. As I said, Jason Whitton is my name. Each morning jump on quick Facebook Live around about eight o’clock with the gang, the crew and we talk about property investing, all things around the world of property, market places, etc. Been investing 20 years myself, coaching property investors across Australia and New Zealand over 18. So I’ll share a bit of experience, ideas, strategies, tactics, about property investing and making sure we go the distance in this gig. Because it is a marathon, not a sprint. So for those who are joining us for the first time, welcome. For those who are coming back. Good morning, Margaret. Good morning, everyone. Who’s jumped on this morning for a quick Facebook Live. There’s Christopher. Yeah, the borders are open again you beauty Morning evade. Yeah, it’s good to see the ability for everyone to travel and get their spirits back. It’s great to see the world of people’s ability to get out and about and take care of themselves. Re-energize which is awesome and travel at least into state for the moment, I did see that some international flights are going to resume on this December the seventh in Melbourne. So I’ll be interested to see what happens there. So morning, Alan. So great to see everyone jumping on. Listen, today I wanted to talk about the idea of how do you measure? Cause there’s a number of ways that investors measure their success in a real estate world or in any investment. They call it yield, call it growth, call it cash on cash return, call it return of cash, which way do you measure the investment ? To say oh well, am I on track? What am I doing? How are we progressing? Am I succeeding? Am I not? So it’s an interesting question. Because the answer is, it depends. It’s, there’s never one direct answer. But let me talk you through a few things today. A few things that I always sort of say to people to keep an eye on. When we talk about yield. Okay, so that the return, the value of that property or stock is producing in a rental income. Now, rental income and yield. That’s a very simple, easy calculation to do. You do the annual rent divide it by the value and you end up with a percentage. Now, as property investors were aiming at 5% or more of the rental yield from at a purchase. And worst case scenario, maybe 4 1/2% maybe for a property in a better location. Okay, so 4 1/2% to 5% minimum and upward from their rental yield, which means the return based on the value of the purchase price is that percentage. Now, as the property grows in value, let’s say you purchased it for 500,000. And now it grows to 700,000. What is your yield then? And this is an interesting conversation. Good morning, Alison. Is my property keeping up? Is the rent keeping up dollar for dollar? Is it producing the income? And the statistics show over a 10 to 12 year period in Australia. Property prices in strong areas often go up between 50 and 100%. And that’s over a sort of a 12 to 15 year period, the latest two cycles have been and the rents don’t keep up with doubling they go up 50% are buy and large. So you can expect the rental yield to decouple detached from the value of the property as it travels along. Okay, that’s very normal. That’s to be expected. Because the values especially in residential property, are not linked to the or the rents are not linked to the values in commercial or retail property or industrial property. The values and the rents or the income that you can generate from that property are intrinsically linked. So if you can put the rents up means often the value will go up on your property in residential, industrial, commercial, that sort of thing. So not residential, sorry, retail. Now residential property, you buy a property for 500, it goes to 700. Now your rent might be 650 and so on and it starts to drop away. Is that a bad thing? The answer is no. How I measure this is my return on my cash or the return of my cash. Let me. Good morning Ingrid. Got me to sort of explain this one as we go. So return on capital, return on cash. Some people like to do that, well, if I put $100,000 in to my property, I put $100,000 in. So let’s do this. It’s easy to do it on a whiteboard. But maybe I’ll do that next time. If I bought a $500,000 property, and it’s renting for $25,000. That’s a 5% return. That’s a 5% income. Now, that’s not my total return. Because if I added in my capital growth, and I added in my tax deductions, cause I like to add in those tax deductions, a lot of people say oh, you don’t have them, it’s like this rubbish. It’s real cash flow. And for us is probably this is we’re not selling them. So you can add it in to your return as far as I’m concerned. So that’s my total return, you can add up your yield, you can add up your growth, and you can add up your tax back, your tax cash flow back, and you can keep them separate, but your total return might be 5% yield 3% growth and 1% back, okay. Returning your cash, it’s the job done. You did right, Allison. So for me, as we go forward, the most important conversation for me as a property investor, is if I put $100,000 into that property, how fast does that property return my cash? Okay. So if I put five $100,000 into a $500,000 property, and let’s say, four years later it’s gone up $100,000 dollars. I can release the equity, I can take that 100,000 dollars back out, and I can put it back where I got it from. Often it’s from our homes. So you take the 100,000 dollars out, you plunk it in back in your own home. And now you have a property that owes us zero. There is no money in that property whatsoever. It has done its job, it’s returned all of its capital. It’s returned it back to you as the investor. And now that is stand-alone, zero funding from anywhere else. And from that point onwards, that property is now what I term giving you an infinity return. Because you’ve got no money in the deal. There’s no money in the deal. So your return is at endless. So there’s nothing that you have to put in and especially if that property is cashflow positive, and the rates have gone up and so on, then you’re all you’re making great headway. Okay. So the way I like to look at it is how fast does the property return my cash? And once it’s done that, then I’m very happy with the property. Now if it takes forever to return my cash? That is when sometimes I might maybe this is a bit of a dog this one, and maybe I can move it on. Okay. And I’ve had to do that a few times in my portfolio just because I’ve bought some rubbish properties, and all of us every now and then end up with a property. Sometimes without the right due diligence, sometimes we bought it and something didn’t go right, whatever. And sometimes, we just need to move on from those. But our aim, especially in mentoring is not to end up with rubbish properties is to end up with good ones right from the start because we do more work at the front rather than having to clean it up at the back. But I was a bit mad at the front. So but that was many years ago. So listen, that’s how I like to measure my returns. And as we go, one thing that of a lot of financial planners like to do, they like to quote returns, like they say, what’s my yield on on my investment? Okay and I’ll go, Oh, well, my yield on my investment was 12% okay or 15% way better than property. And it’s actually not accurate. It’s actually not true what they’re saying, because it’s not a yield. And the yield is an income generated from owning and holding an asset. Okay, that’s the yield. That’s the way I define it. You own a property its yield is what it produces in income when you continue to own it. Now, a lot of financial planners a lot of people in the share market like to quote, high-yield based on the activity of selling shares, not just the dividends. The sale of the shares and so oh my yield, my yield was 12%. Okay. Now that is not an investment process that is a trading process that is buying and selling. Okay. And we’ve talked about this before. Buy own forever. That is investing, as far as I’m concerned when it comes to real estate. If you are going to trade, buy and sell, perfectly fine. Don’t call it investing, passive income investing, it is trading investment. It is a business when you buy and sell stock, that is a business that is not passively investing. Okay, again. Anyway, that’s my little soapbox moment this morning, I thought it’d be a good chat to have about measuring and understanding how I’m succeeding. And listen, maybe your property doesn’t return all the capital immediately. Maybe it returns 20%, maybe it turns 50% of it. And that’s good too. As long as when you’re measuring the success of the deal. If you’ve got 100% of your capital back and that property takes a little bit of time to get going, then who cares? It doesn’t owe you anything. Okay. And that’s the way I like to measure how I’m doing. And like Ingrid said, it’s always a long term vision, which is spot on Ingrid. So, yep. Let’s do this thing. And I like that Alison. The only thing that you tried to stir from the shop sell it for more than you paid. I love that stuff gang. It is it absolutely awesome. Some side hustles I’ve done that with my kids. We’ve got side hustles going on selling fidget spinners and two meter iPhone cables and all sorts of stuff. It’s lots of fun. And these days, it’s easier than ever to make a little bit of cash on the side and have a bit of fun while you’re doing it. Anyway, hope you’re all awesome. And well, Terrific Tuesday it is. Have a great day. Hey listen, jump on and have a listen to my most recent podcast from John Wood. One of my all time heroes, he’s an absolute legend. I love him. And yeah, it’s a good one. Well I enjoyed it anyway hope you guys do. The Well faculty, John Wood Founder of Room to Read charity, which is so cool. And I love that guy. And yeah, give us a thumbs up and leave us a comment if you like it. Give us a rating on iTunes it helps us scale up the charts a bit so, all good, all right gang. That’s it. I’m done and dusted coffee in a chat over and out. See you tomorrow at eight o’clock for another coffee and chat Adios. Take care gang. Bye bye.


About the Author
From a small town boy growing up in the remote outback of rural Queensland, to becoming the founder of Australasia’s most powerful property wealth creation engine – Positive Real Estate Group CEO Jason Whitton is on a mission to change the way we look at wealth.