In this Storage 100 episode, Joe Downs explains the cash‑on‑cash (CoC) return, the single most important metric for measuring how much cash an investor actually pockets from a self‑storage deal. He defines CoC as annual pre‑tax cash flow divided by total cash invested, walks through a straightforward all‑cash example (a $1 M property with $80 k NOI yields an 8% CoC), then shows how adding a 70% LTV loan changes the cash flow to $30 k and boosts CoC to 10% – illustrating positive leverage. Downs warns about negative leverage when the loan interest rate exceeds the property’s cap rate, which erodes returns. He contrasts CoC with IRR, noting CoC captures the immediate cash‑flow snapshot (typically year 1) while IRR reflects the full investment horizon, including appreciation and principal paydown. The episode outlines benchmark CoC targets: 4‑6% for Class A stabilized assets, 6.5‑7.5% for Class B/C value‑add, and 0% in year 1 for development projects (with upside on refinance). Finally, Downs urges investors to prioritize cash flow, aim for double‑digit CoC returns, and use leverage wisely to build a resilient, profitable portfolio.
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Hello folks, and welcome to the Storage 100 series. We are on day 54. I am Joe Downs with Storage Moguls Mastermind, and today we are diving into the one metric that truly shows you how much money you're making. It's all about cash, folks, and the cash-on-cash return, and it's critical for understanding your investments. This isn't just a number. It's not a number we toss around. It's a direct reflection of what's going in and out of your wallet. So let's break down why this metric is so powerful because it helps you compare different investment opportunities and really highlights the impact of leverage. So let's get into the formula itself. So what exactly is it? Cash on cash? Well, it's pretty simple. It's your annual pre-tax cash flow divided by your total cash invested. I'll say it again. Your annual pre-tax cash flow divided by your total cash invested. So cut straight to what matters, the actual cash in your pocket. Cash flow, remember, is your net operating income or NOI minus your debt service. And this gives you a clear picture of your investment's performance. It's a straightforward way to measure your return. We're going to look at how this plays out in real scenarios, but first, let's see this formula in action with an all-cash purchase. Imagine you buy a property for $1 million and your net operating income, or NOI, is $80 grand. Since it's all cash, your purchase is all cash, your total cash invested is that same $1 million, and your cash flow is still that same $80 grand. So when you do that math, your cash-on-cash return is 80%. 80%. 8%. 80 divided by a million, $80,000 divided by a million. It's a solid return, but it's just one way to invest. So let's see how leverage can change this picture dramatically. So let's introduce leverage into this equation. And this is where things get really interesting for your returns. With a million-dollar purchase, that same million-dollar purchase, and now we use a 70% loan-to-value. So we borrow $700,000. And now to buy this property, I'm going to use a $700,000 loan and I'm only using $300,000 of my cash. The NOI didn't change. Same property, that's still $80,000. But now I have introduced— because I borrowed money, I've introduced debt service. And let's just say that costs $50,000 a year. That means my $80,000 less my debt service leaves me with a cash flow of $30,000. But look at the cash-on-cash return when you do the calculation now. $30,000 divided by $300,000, it jumps to 10%. That is positive leverage. That's a powerful tool. And it shows how using debt wisely can boost your returns. So why does cash-on-cash return matter so much? Well, first, It helps you compare different investment types on an even playing field. You can compare real estate to stocks or bonds directly. Second, it focuses on the actual cash you spend. This isn't just theoretical profit, it's money in your pocket. And third, it clearly shows the power of leverage. It accounts for how efficiently you're using borrowed money. This metric gives you a true sense of your investment's effectiveness. It's about understanding the real impact. Excuse me, impact of your personal wealth. But not all leverage is good leverage. We need to avoid a negative leverage scenario because negative leverage occurs when your interest rate is higher than your property's cap rate. And this means you're paying the bank more in interest than the property is paying you. So your cash-on-cash return will be lower than the cap rate, which is a red flag. Essentially, the property isn't generating enough income to cover its financing costs. It's like digging a hole instead of building a foundation. Always compare interest rate to the cap rate to ensure positive leverage. Now let's clarify the difference between the 2 key metrics. Building on the IRR discussion— I'm sorry, building on the discussion returns, it's crucial to understand the difference between cash-on-cash and IRR. Cash-on-cash returns tell you about the immediate, right now money you're getting from your investment. Typically in year 1. It's a snapshot of your annual cash flow relative to the cash you invested. IRR though, or internal rate of return, gives you the total picture over the entire investment period. IRR accounts for the cash flow, appreciation, principal paydown over time, providing a more comprehensive view. Don't confuse these 2 though. They measure different aspects of your investment's performance. Both are important, but they serve different purposes in evaluating a deal. All right. So let's look at what constitutes a good return across different investment types. Well, it really depends on the asset class and risk. For Class A stabilized properties, you're typically looking at a 4 to 6% cash-on-cash return. These are safer, lower-risk investments with predictable income. The Class B B and C value-add opportunities where you're improving the property probably target more like a 6.5% to 7.5% return. These carry medium risk but offer higher potential returns through forced appreciation and increased cash flow. Development or new builds can have a 0% cash-on-cash return year 1 because you're building them. There is no cash flow, but the goal is a significant return upon refinance. years later. This is the highest risk but also offers the highest potential reward. Understanding these benchmarks helps you set realistic expectations for your investments. So to wrap up our discussions on returns, remember this core principle: cash flow is king. While appreciation is certainly a welcome bonus, it's the consistent cash flow that keeps you in the game. Cash flow covers your expenses, pays down your debt, and provides ongoing income. Appreciation's great, but you can't pay the bills with it until you sell or refi. Always target double-digit cash-on-cash returns whenever possible. This ensures your investment is generating strong immediate income and provides a buffer. And always prioritize cash flow to build a resistant and profitable portfolio. All right. If you found this information valuable, please hit the like button and of course, subscribe to the channel if you haven't yet to stay updated on all things self-storage investing. We've still got about 51, 52 episodes to go. I've lost track. Lastly, don't forget to share this video with your friends who only care about IRR. They'll thank you later.
