Investor · Montello, WI · Member since 2012 · 8 posts · 4 votes
Okay, let's say that you just plunked down 100K on some piece of property. As the professional investor that you are, what monthly cash flow figure would you find an acceptable return on that $100K? I asked that question at a REIA meeting in Chicago and was kind of surprised that most of the attendees there said they'd be happy with $150.00 a month in positive cash flow. I think that's too low. Any thoughts?
$100k, pure cash deal? I would be looking to gross at least $1600. So I would be looking to cash flow $800 a month on an all cash $100k (50% for expenses) but would look to lower expenses.
Basically I know I can get at least 10% on my money, so I would want $800 at least a month, whichever way you use it.
& they would be the type of buyers we are glad to sell to...
In my depressed, high taxed area I only LTO SFH & get @ least 10%-12% return.
Admittedly if I take it back & do a rehab it drops for awhile. I just did a major rehab on one after 4 years of LTO & the ROI has dropped to 9%.
I feel as if the answer to the question would be different from a beginner's standpoint to an advanced invester. I myself am a beginner and I still have yet to purchase any investments yet, but I wouldn't think 150$ in positive cash flow a month is a bad purchase. But to the advanced invester 150$ could very well be to low. So what I am asking is, would this be a bad purchase for the first property of an Invester?
Some markets are mainly appreciation driven so the tax depreciation for the higher sales prices and the expected gain on the back end to 1031 into something else are the main drivers.
The cash flow in those situations is not in the first position like in other markets.
$100k, pure cash deal? I would be looking to gross at least $1600. So I would be looking to cash flow $800 a month on an all cash $100k (50% for expenses) but would look to lower expenses.
Basically I know I can get at least 10% on my money, so I would want $800 at least a month, whichever way you use it.
Exactly
Unless you are assured of significant cap app, you would be better putting the $100k into a good dividend stock or hold a note.
In fact $150 after all ancilary expenses, taxes & inflation would probably return less than 91 day treasury bills!!!!
Everyone has different goals for their investments. Some are looking to build wealth, some are looking for capital preservation, some are speculating, some are looking for diversification and some think they need a tax deduction. Depending on what the investor is looking for and depending on the investor's other opportunties, their desired returns are going to be different.
Now, that said, $150/month return on $100K investment doesn't seem worthwhile without some speculation for appreciation. It's only 1.8% COC return, and I believe you can get that with a CD these days.
Personally, I'd want to see at least 15% COC, or about $1250/month in cash flow.
Thats really the follow up question that should have been asked to the initial question right off the bat. If you had 100k, would you rather put that in one all-cash deal or use it to buy 5 homes?
Because anybody that would take 100k and pay cash for a home is missing out on the real benefits of investing - leverage.
If you pay 100k for a house, the only thing you're going to get is your net income from rent and appreciation. But the appreciation won't do much for your return. And you'd get no principal paydown.
For anybody really interested in maximizing their COC returns, you simply can't buy property all cash.
Appreciation is the most obvious one.
100k house goes up 3% or 3k in a year. If you paid 100k, you're COC only goes up 3k.
But if you bought that same house for 100k and put down 30k and then it goes up 3k, that increases your COC return 10% right there.
Here is what I always look at:
100k ALL CASH vs 30k DP, Rent is 1,300/mo, Taxes and ins, 400/mo. 70k mortgage = 350/mo
ALL CASH
Net income before repairs/vac: 900/mo
Less 100/mo for repairs/vac: -100/mo
Appreciation: 3k/yr (250/mo)
Principal Paydown: 0/yr
Depreciation/Tax benefits: 50/mo (3k depreciation, after taxes thats about 600/yr)
TOTAL: 1100/mo or $13,200 which is 13.2% COC return
30% DP or 30k
Net income before repairs/vac: 550/mo
Less 100/mo for repairs/vac: -100/mo
Appreciation: 3k/yr (250/mo)
Principal Paydown: 1,200/yr (100/mo)
Depreciation/Tax benefits: 50/mo (3k depreciation, after taxes thats about 600/yr)
TOTAL: 850/mo or 10,200 which is 34% COC return
Therein lies the difference. I'm sure you can play with some of the numbers above (i.e. repairs/vacancies) but they would be the same both.
What you can't dispute is how the leverage affects your COC return.
So is 13% reasonable? Sure. But wouldn't it make more sense to triple it?
And where it really is something is when you can buy a house for 10% down. Your cash on cash goes up that much more. And what is it when you can do NOTHING down? Infinity?
So its interesting that people would in the group would have accepted 150/mo (my guess is they meants 1,500 a month and just lost their calculators). Wouldn't it make more sense to have asked why in the world anybody that cared at all about coc return would pay 100k cash in the first place? :-)
The dollar amounts don't matter, and the return he mentioned may sound quite high (it's very nice!), but $1,250 cashflow per month on $100,000, is $15,000 / year, aka 15% cash-on-cash return.
Having $100,000 cash to invest, you can definitely command 15% returns. Now the question is, will you hold out for those deals to come by?
