BiggerPockets

Hello everyone, i just wanted to ask some of you experienced CRE investors a question.

1. what kinda cash-on-cash returns do you look for?
2. are you finding it hard to find deals with your cash-on-cash
requirements?
3. is there ever a time when you'll go through with a deal, even
when you can't get the cash-on-cash returns you want? if so,
please explain

the reason for my questions is because i'm finding it almost impossible for find deals offering the kinda cash-on-cash returns i'm seeking (20%).

So i just wanted to know is this something i'm doing correctly and i just have to keep searching for that right deal, or is this percentage completely out line (to high) and i need to come down a little to reasonably figure.

1. Believe it or not my personal minimum ROE is 25% and I shoot for 50%.

2. Its not easy to find these deals no, however the key to a high ROE/COC is your use of leverage. For example, suppose you put down less of your own money in the deal (10%) and you achieve this by way of pooled funds or a syndication. Then this means that YOUR down payment excluding the money from the bank and the money from the partners/investors will be used to find your ROE/COC. Why is this? Because the amount above and beyond the supposed (10%) you put down in this scenario are considered borrowed funds when using this equation. The higher the downpayment the harder it is to achieve that magic number of 20%.

3. Never go through with a deal that does not fall within your guiding parameters. NEVER.

20% is not out of line. Especially not in this market. LOL. And it will get better believe me. Some people are able to get returns 100% COC. Also keep in mind that there are tons more variables like increasing the NOI within the first year thus increasing cash flow or reducing expenses.

The key is not always what the COC/ROE is today but what it WILL be tomorrow with your brain calling the shots.

GOOD LUCK

Hello everyone and thanks for all of your comments, i really appreciate you sharing your knowledge.

Now, i don't really know how successful all of you are in this business, or even if CRE investing is your main focus, but i can tell you that last week i had the privilege to speak with a gentlemen who is part of a very large CRE investment company holding hundreds of millions in assets.

while i had his attention and he was so willing to share info with me i had to asked him multiple questions, now when i asked him about this cash-on-cash return thing(which is a preference we all now), he straight out told me i was crazy to believe that i was just gonna walk into a deal and get 20% return on my money that same year like that, he straight out told me i'll be better off looking for a needle in a haystack.

he told me anybody out there waiting on deals like that will be waiting for a very long time, and must be looking at investing as a hobby and not a business, you make your money mainly from the reposition (forced appreciation), once i a while you'll get a great purchase but nothing to the point were it's 20% CoC return straight up before you do anything to the property

Jon, first off thanks for commenting and sharing your knowledge.

jon i just wanted say, when i talk about cash-on-cash return i'm definitely talking about a CoC return with your financing in place (so if i was unclear about this i'm sorry, i just figured everyone would know what i was talking about)

jon you are right there are some people that calculate their ROI only from the standpoint of how much money they themselves came out of pocket and don't include financing into the mix, actually the people who do this can make their return look infinite if they actually put NO money into the deal at all.

but i say who is the joke on, when you can make yourself look like your getting this huge ROI percentage but are not making no money. so jon when i say what's your CoC return i'm talking about with your financing included.

like with a 30% down (its hard nowadays) and a 7% interest rate over 30yrs

this is what me and this gentlemen was talking about, that's why he said i would be crazy looking for 20% CoC return properties with the factors i just stated above. he also said that if their were a property like that out there most investors wouldn't even see it because it'll probably go straight to a company like his in about two seconds.

Chris J,

This guy was part of a very large commercial real estate investment firm and this alone could be the reason why he does not expect to get the type of ROE that I or other investors expect and I'll explain.

1. There are different property classes (4) within real estate. You've got class A (the best), B, C, and D (obviously the worst). These classes are determined by the age of the respective properties, the condition, and the amenity items expected by the market. Most LARGE investment firms are called institutional investors and typically these guys compete for class A properties because they command higher rents, have lower maintenance costs (due to the younger age), and they are much easier to manage. With such properties it is a little more difficult to achieve the ROE that one might be able to get in any of the other property classes.

This has to do with the risk and the advantages associated with that particular property class.

2. He may not expect the bargain that I or some of the other investors expect. And who says that this large investment company hasn't made some bad decisions. Look at Lehman. Big doesn't always mean smart.

3. To reiterate what has been said earlier, the ROE formula can be manipulated by adjusting either the Down Payment/equity or the cash flow (which you can only be calculated after the debt service so the argument over the consideration of financing is a moot point). Maybe this large institution goes at it all alone with no investors, partners, etc. and this is why they have a hard time getting a 20% ROE. Maybe a smaller down payment on the companies part and bringing in some debt partners would make 50% possible?

4. Real Estate is hardly monolithic. Maybe this guy is investing in San Francisco, CA when I invest in Roanoke, VA and William Barnard invests in Oklahoma City, OK. In other words, maybe in his particular market of expertise it is extremely competitive and thus impossible to find properties with great ROE's. If that be the case it does not mean that HIGH ROE's aren't achievable it just means that they are not achievable in his market.

5. Asset type is also a worthy consideration here too. Maybe he only invests in apartments that coupled with the his geographic location of expertise could keep him from achieving a high ROE.

I think that I may be beating a dead horse here. But I will ask you a question: Have you established why COC/ROE is an important staple within your personal investment criteria?

Commercial Real Estate is a game of assumptions. There is no law here and there are no impossibilities. NEVER forget that. As Trump would suggest there is an ART to the deal.

Lastly, there is an inherent difference between ROI and ROE. They are not the same. Look it up when the chance arrives.

Good luck.

a couple things. First you asked about cash on cash, and some people responded with their ROI requirements which are two entirely different things from my perspective. I agree with your other CCIM friend, 20% cash flow requirement is pretty much a fantasy. However 10-15% cash flow can be had pretty easily. Some people will go for lower cash on cash returns if the property is less risky or has less management involvement. Same goes for the ROI on sale or refi.

Myself, I shoot for 10-15% cash on cash, and 20-25% ROI. By looking for value plays, more than 25% ROI can be gotten at time of sale or refi.

You can do better than that occasionally and there are lots of creative ways to find super deals, but the numbers I am quoting are easy enough to find in some areas with fairly straight forward, standard deals. That is what works for me.

There are a lot of different ways to invest. Some people will forsake their cash flow and hopefully get a higher ROI, either through rehabbing or some other value play. Using more bank leverage can also increase your ROI while decreasing your cash on cash (cash flow), but that also increases the risk.

For me, I want solid cash flow. I am currently in a deal with only 8% cash flow and 22% estimated ROI (annualized), but its extremly low risk and and zero management, almost a NNN deal. Another deal I'm getting 15% cash on cash, and expect to see ROI around 40% by year 3 if I were to sell at that time, but after that the annualized ROI will go back down to the mid 20's...and ROE of course goes down even more.

You have to find a strategy that works for you. I like to have solid cash flow because I don't want to have any risk about going negative. But I also won't settle for an ROI less than 20% per year either, but that's just me. There are lots of deals out there like that, but maybe not where you live.

Looks like many of the terms and abreviations for those terms have been intermixed incorrectly. I was no exception.
Cash on cash return (COC) is simply annual cash return divided by initial total amount invested (including closing costs, etc)
Return on Equity (ROE) is more commonly used for stocks as it relates to how management performs on the re-investment of the earned dividends.
Return on Investment (ROI) is a very loose calculation as it can be munipulated in a number of ways.

When I stated I look for a return minimum of 25%, I meant to say my ROI, which includes in MY calculations, the cash flow, tax savings, and principle reduction. You can also add in equity at purchase to improve the % as well as appreciation (which I never do).

Anyways, now that I cleared that up, I feel better. Many posters here said that 25% is a needle in a haystack, and based on COC, that is true. Based on ROI, as I calculate it, it is not.

No, I think that covers it. What your true retuirn on the amount invested is and when you can expect the principle to be returned over time covers coc.

The key here is to realize that there are a number of calculations you must do on any investment to make sound decisions to invest. COC is only one of many.

Essentially, when discussing real estate, ROE and COC are synonymous. Both are ratios that compare and contrast annual net income or cash flow and your down payment or equity interest. As Steve's implies, none of these formulas are static. Year after year the deciding variables can change dramatically, for better or for worse, and give you a totally new number for year two or three and so on.

Even though that is a valid point, I personally tend to use COC as a part of an larger rubric for qualifying a property. And because of that I don't normally revisit and reuse this formula unless I've chosen a turnaround or value add property with a short investment horizon.

I still stand by what I said on the 25%-50% COC. This can be accomplished simply by bringing in a debt partner and you in turn treating this partner as debt financing/an additional mortgage. A high COC does not mean that you made a tremendous amount of money. No, it only means that you shared a good deal with others, mitigated your risk exposure, got your money back in a timely manner, put down less than you had to, and negotiated your butt off.

P.S. At times, it can also mean that you practically took the legs from under the seller and stole the property.

Excellent point(s) Will.

Looking back, this has been a very good thread wouldn't you all say?

Thanks to all for contributing.

Thanks to Chris J for the question.