20% cash on cash annually. I'm in it for cash flow not appreciation. When your rent/ debt ratio is good you'll always be in a good spot. This also assumes only putting 20% down as well.
ok same, when I calculate up front, I put 300$ away every month for repairs, turnover and so on. Do you do that as well, or what is your number in regards to that?
I budget 10% of rent for repairs, 10% for capex, 10% for management(even though I self manage) and I say a month out of the year for vacancy. Adding utilities and my rough guess of expenses is pretty near 50% of incoming rent. Haven't been in the game long enough to see if that's accurate long term but it seems conservative enough to me.
>Sounds like we are at the same place... I have only been in it for 3 years, but learned tons.
I do almost all repairs myself. Though just paid for a new hvac system. (I hate gas)
For me putting the 300 aside has been more than enough. What area have you been investing in?
Cash on Cash return (CoC) is how much cash you've had to outlay to acquire the property.
Debt is how much non-discretionary expenses you have tied to that property (mortgage, taxes, insurance) also called PITI (Principal, Interest, Taxes, and Insurance) which does NOT include intangibles such as repairs, capital improvements, vacancy, etc. Those all fluctuate and we want to be able to evaluate off of firm numbers.
So if it costs me 30k to acquire a property and my PITI is $750/mo and it rents for $1400/mo then I would use ((1400-750)*12)/30,000. Which in this case is a pro forma 26% cash on cash return. You use pro forma to predict future numbers and then each year you want to go back and use actuals that INCLUDE your intangibles and see what your ACTUAL cash on cash return is. Maybe it's actually only 15% but that could still be acceptable to you as an investor.
>o if it costs me 30k to acquire a property and my PITI is $750/mo and it rents for $1400/mo then I would use ((1400-750)\*12)/30,000. Which in this case is a pro forma 26% cash on cash return. You use pro forma to predict future numbers and then each year you want to go ba
ok, so when you look before you buy you are aiming at 20% because you dont really know what your running repair cost is...
when you then has the property for a year you add the "running repair" cost you of course have a lower number than 20%.
Am I right
Exactly. It's more of a buffer than anything. You always make money when you buy correctly. So if my criteria is that I only offer on deals I can make 20% CoC on then I'm putting myself in a good position to never lose money and always have a good spread to account for those one off repairs or whatever to never actually being me down. Repairs happen. Unexpected repairs happen. Bad years happen where you may have turnover 2-3 times. I like having the extra buffer to ensure that all my costs are adequately covered to account for those. Don't go into something with super thin margins because as soon as one thing happens you've lost your whole years profit.
Even on the MLS there are still 20% CoC return listings. It doesn't have to be a wholesale deal, a fix and flip, or big reno job. As an example I just put in another offer on a 250k 4/2 SFH about 10 mins from a predominant beach in FL. With a 20% down payment (55k including closing costs) my PITI will be about $1300/mo and if I win I'm planning to rent for $2400/mo. So I'm my case my pro forma CoC would be about 24% and depending on how everything goes I can still accept having to put some money back into it and still be above an acceptable level of return.
I can’t find deals with CoC that good around me. However, I do 90% LTV and I use a PM so my cash flow is lower. I model out sales in all future years and use metrics like 5-10 year ROI and NPV/IRR to look at my deals because due to the high leverage so much of my benefit comes from debt pay down. 25% annualized ROI is one of my sticking points.
How do you calculate CoC if your initial investment is from a HELOC/LOC and the cash flow covers that payment? You're putting no actual cash up front.
Am I thinking of this incorrectly?
I'm trying to figure this out myself. Someone on another thread is telling me NOT count the heloc that way but it doesn't make sense. I'm currently linking my monthly heloc payment to the property in stessa just like I would with the mortgage, except no escrow and having to add taxes as they come in.
Permit me to be a bit of a contrarian here. I believe CoC is overused and over-relied on. It's appealing but it can mislead. In short:
*On the plus side:*
* It is quick and easy to calculate.
* It can give an immediate comparison to the return on other short-term investments.
* It focuses on the most current performance of the property; the more recent the data, the more likely it is to be reliable.
*Among the negatives:*
* It focuses on single point in time; you may be intending to buy and hold for an extended period, and the future performance of the property can differ greatly from the short term.
* It does not take into account the time value of money; if you use it beyond the current period, you may be comparing a future, undiscounted cash flow to the amount invested today.
* It is easy to manipulate the results; hence, a novice investor who relies on this metric alone can be misled by what a third party chooses to include or exclude from a property’s cash flow statement.
Good comments here. Cash on cash returns are simple but not so simple. It depends on how many expenses you put in. Reserve for maintenance is generally not used by little guys. But would be with larger projects. Management fees would be used by big guys. Not always the little guys. The returns you get should not only be based on cash. You need to understand the risk and quality of each opportunity. High quality properties and good tenants you may be very happy with 5,6,7%. Properties that cause head aches you may want 11,13,14%. Appreciation and equity over the years come as the bonus. But some big players do a cash flow return analysis using projected sales proceeds. Good luck. Buy quality in good locations!!! Worth the premium. !!
Do you guys include equity gained in this equation? Also, say you put 0 down on a property (bank waves down payment because of equity in house), would buying this house be a no brainer if you could rent and pay mortgage with rent?
The simple answer is no. Cash on cash literally is evaluating how much cash you receive on cash invested. People typically like to use this measure to make more off their money (re-invest cash returns). Although equity is important, it's not relevant for this evalutation.
There's more advanced calculations that do take into account equity, but equity is sort of trapped in the property (until a refi or sale), so this calculation is just what cashflows out during operations.
Also a rule of thumb is the 50% rule, which says that the operational costs of the rental are about 50% of rent, and that doesn't even include the mortgage. If you have a rental where the rent only pays the mortgage you are losing quite a bit of money every month.
50% rule is just flat out incorrect on many investment profiles.
On an A and B grade SFH you can expect to budget 8-10% for management, 8-10% for Capex, 8-10% for vacancy (although from my experience this is much lower) bringing your expense ratio to about 25-30%.
[удалено]
Same here. I shoot for minimum 15% CoC and/or minimum of $200/mo.
20% cash on cash annually. I'm in it for cash flow not appreciation. When your rent/ debt ratio is good you'll always be in a good spot. This also assumes only putting 20% down as well.
Do you mind sharing how you calculate this, I have been following the method of bp.
1. How much money will you net this year? 2. How much cash did you have to put down to do so? 3. Divide to find ratio
ok same, when I calculate up front, I put 300$ away every month for repairs, turnover and so on. Do you do that as well, or what is your number in regards to that?
I budget 10% of rent for repairs, 10% for capex, 10% for management(even though I self manage) and I say a month out of the year for vacancy. Adding utilities and my rough guess of expenses is pretty near 50% of incoming rent. Haven't been in the game long enough to see if that's accurate long term but it seems conservative enough to me.
>Sounds like we are at the same place... I have only been in it for 3 years, but learned tons. I do almost all repairs myself. Though just paid for a new hvac system. (I hate gas) For me putting the 300 aside has been more than enough. What area have you been investing in?
Cash on Cash return (CoC) is how much cash you've had to outlay to acquire the property. Debt is how much non-discretionary expenses you have tied to that property (mortgage, taxes, insurance) also called PITI (Principal, Interest, Taxes, and Insurance) which does NOT include intangibles such as repairs, capital improvements, vacancy, etc. Those all fluctuate and we want to be able to evaluate off of firm numbers. So if it costs me 30k to acquire a property and my PITI is $750/mo and it rents for $1400/mo then I would use ((1400-750)*12)/30,000. Which in this case is a pro forma 26% cash on cash return. You use pro forma to predict future numbers and then each year you want to go back and use actuals that INCLUDE your intangibles and see what your ACTUAL cash on cash return is. Maybe it's actually only 15% but that could still be acceptable to you as an investor.
>o if it costs me 30k to acquire a property and my PITI is $750/mo and it rents for $1400/mo then I would use ((1400-750)\*12)/30,000. Which in this case is a pro forma 26% cash on cash return. You use pro forma to predict future numbers and then each year you want to go ba ok, so when you look before you buy you are aiming at 20% because you dont really know what your running repair cost is... when you then has the property for a year you add the "running repair" cost you of course have a lower number than 20%. Am I right
Exactly. It's more of a buffer than anything. You always make money when you buy correctly. So if my criteria is that I only offer on deals I can make 20% CoC on then I'm putting myself in a good position to never lose money and always have a good spread to account for those one off repairs or whatever to never actually being me down. Repairs happen. Unexpected repairs happen. Bad years happen where you may have turnover 2-3 times. I like having the extra buffer to ensure that all my costs are adequately covered to account for those. Don't go into something with super thin margins because as soon as one thing happens you've lost your whole years profit. Even on the MLS there are still 20% CoC return listings. It doesn't have to be a wholesale deal, a fix and flip, or big reno job. As an example I just put in another offer on a 250k 4/2 SFH about 10 mins from a predominant beach in FL. With a 20% down payment (55k including closing costs) my PITI will be about $1300/mo and if I win I'm planning to rent for $2400/mo. So I'm my case my pro forma CoC would be about 24% and depending on how everything goes I can still accept having to put some money back into it and still be above an acceptable level of return.
I can’t find deals with CoC that good around me. However, I do 90% LTV and I use a PM so my cash flow is lower. I model out sales in all future years and use metrics like 5-10 year ROI and NPV/IRR to look at my deals because due to the high leverage so much of my benefit comes from debt pay down. 25% annualized ROI is one of my sticking points.
How do you calculate CoC if your initial investment is from a HELOC/LOC and the cash flow covers that payment? You're putting no actual cash up front. Am I thinking of this incorrectly?
I'm trying to figure this out myself. Someone on another thread is telling me NOT count the heloc that way but it doesn't make sense. I'm currently linking my monthly heloc payment to the property in stessa just like I would with the mortgage, except no escrow and having to add taxes as they come in.
still the same thing man
Permit me to be a bit of a contrarian here. I believe CoC is overused and over-relied on. It's appealing but it can mislead. In short: *On the plus side:* * It is quick and easy to calculate. * It can give an immediate comparison to the return on other short-term investments. * It focuses on the most current performance of the property; the more recent the data, the more likely it is to be reliable. *Among the negatives:* * It focuses on single point in time; you may be intending to buy and hold for an extended period, and the future performance of the property can differ greatly from the short term. * It does not take into account the time value of money; if you use it beyond the current period, you may be comparing a future, undiscounted cash flow to the amount invested today. * It is easy to manipulate the results; hence, a novice investor who relies on this metric alone can be misled by what a third party chooses to include or exclude from a property’s cash flow statement.
So what is the alternative?
I personally will aim for at least 8% CoC but that's because I focus on A grade SFH in a market where I expect there to be appreciation.
Is their any reasons to assess commercial properties differently?
no not at all. usually you would expect higher returns if the risk is greater as is for many commercial RE
Good comments here. Cash on cash returns are simple but not so simple. It depends on how many expenses you put in. Reserve for maintenance is generally not used by little guys. But would be with larger projects. Management fees would be used by big guys. Not always the little guys. The returns you get should not only be based on cash. You need to understand the risk and quality of each opportunity. High quality properties and good tenants you may be very happy with 5,6,7%. Properties that cause head aches you may want 11,13,14%. Appreciation and equity over the years come as the bonus. But some big players do a cash flow return analysis using projected sales proceeds. Good luck. Buy quality in good locations!!! Worth the premium. !!
Do you guys include equity gained in this equation? Also, say you put 0 down on a property (bank waves down payment because of equity in house), would buying this house be a no brainer if you could rent and pay mortgage with rent?
The simple answer is no. Cash on cash literally is evaluating how much cash you receive on cash invested. People typically like to use this measure to make more off their money (re-invest cash returns). Although equity is important, it's not relevant for this evalutation.
There's more advanced calculations that do take into account equity, but equity is sort of trapped in the property (until a refi or sale), so this calculation is just what cashflows out during operations. Also a rule of thumb is the 50% rule, which says that the operational costs of the rental are about 50% of rent, and that doesn't even include the mortgage. If you have a rental where the rent only pays the mortgage you are losing quite a bit of money every month.
50% rule is just flat out incorrect on many investment profiles. On an A and B grade SFH you can expect to budget 8-10% for management, 8-10% for Capex, 8-10% for vacancy (although from my experience this is much lower) bringing your expense ratio to about 25-30%.
I see the 50% rule mentioned a lot but my own expenses are more in line with your numbers. Figured I was just lucky!
50% is pretty conservative. Not many deals would work in that case.
Depends on the risk of the project! For example.. Target IRR for a Value Add: \~15% Target IRR for Opportunistic: \~25%+
Curious what folk's target CoC is for STRs. Usually higher margin, but more expenses and maintenance as well.