Is a 15% Cash on Cash Return Realistic Long Term?

Goals, Business Plans & Entities
10yFollow

Is a 15% Cash on Cash Return Realistic Long Term?

Joseph M.
Investor · Boulder, CO · Member since 2015 · 118 posts · 16 votes

I am currently setting up my goals and would like to be realistic in my projected returns, because a couple of percentage points make such a huge difference.

My goal is to use $60K of my own cash from income or to use equity in my properties to buy 1-2 properties per year using leverage. If I use a 15% (in cash flow only) annual return on my new investments, at age 40 (11 years from now), I would have $1.68 Million, and at age 50, over $8 Million. These numbers are not adjusted for inflation and also don't include appreciation and loan pay down.

Has anyone been able to consistently average a 15% return long term on their cash using leverage?

2Reply
151 views

Most Popular Reply

James Hamling
Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
10y

The short answer Brian is "yes, but, results may vary", and one BIG variable your not accounting for is that NO real estate has absolute static numbers; there is vacancy to consider, general maintenance but most importantly to never ever forget when doing longer term projections is Deferred Maintenance, those things that DO wear out over time such as roofs, exterior paint/ siding, maybe asphalt, these are some big expenses that if not accounted for can really hit hard. 

I consulted for a private REIT whom had similar goals, so we focused on buys that had newly replaced and upgraded systems like roofs, hvac and so on, so that we had some considerable time of stable numbers without that impact.

Next item is how about rent increases? your COC ROI should improve over time, not remain static and especially not decline, in theory (finger crossed).

Remember the 3 commandments; we make $ when we buy, we retain $ when we renovate, and we reap it when we capitalize it (sell/ rent). It's all about the buy, everything else is adjustments to that. 

8Reply
See this reply in the discussion

62 Replies

Jump to latestLatest
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 31k+ posts · 20k+ votes
    10y
    Originally posted by @Richard Dunlop:
    Originally posted by @CK Hwang:

    I would say yes, but the bigger question is at what risk? what is your tolerance for risk? As I tell my clients who eye the 15-25% returns in markets like Detroit and upstate NY, it's not whether the returns are there... the question really is whether the risks are worth it to them. 

     We don't work that cheap!

    Rented for $600 0% Vacancy.

     4 year tenant was in it when I bought it.

     Gotta call you out on this one Rich. What is the point of the post? Working up to a sales pitch or something? You know, I know.....Everybody knows that something like this is not going to be replicated on any sort of scale.

    I assume this is some one off you bought at the very bottom of the market and you will admit that results are not typical. 

    There is not some magic neighborhood in Detroit where there are amazing $600 tenants happily living in $1,200 houses that we can just assume will never have vacancy.

    4Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y

    @James Wise, I appreciated @Richard Dunlop's humor - and true story. I don't think he was trying to say those deals are out there for anybody to easily pick up with no risk; but you have to admit: it's a good one!

    0Reply
  • Adam Bird
    Investor · Grosse Pointe, MI · Member since 2016 · 35 posts · 3 votes
    10y

    I can honestly deliver and recommend turnkey Detroit @Joseph M.

    0Reply
  • Joseph M.
    OP
    Investor · Boulder, CO · Member since 2015 · 118 posts · 16 votes
    10y

    @Adam Bird Is there a specific turnkey provider in Detroit that you recommend?

    0Reply
  • Willem Young
    Real Estate Professional · Jacksonville , FL · Member since 2015 · 112 posts · 13 votes
    10y

    @Joseph M.

    Yes 15% returns are very possible with leverage.  Right now with normal leverage, our properties return over 20% per year in cash flow on average.   Do your due diligence on turnkey operators though.  They are not all the same.  Good luck.

    0Reply
  • Joseph M.
    OP
    Investor · Boulder, CO · Member since 2015 · 118 posts · 16 votes
    10y

    @Willem Young I have found that the turnkey providers don't account for CAPEX or one months rent fee to get the unit occupied. That changes the return significantly.

    0Reply
  • Curt DavisBusiness Member
    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    10y

    Depending on what you take into account when evaluating a property will drastically change what a homes ROI or cash flow can look like.

    For example:  a $90k purchase with 20% down financing, $5k in est. closing cost, 4.875 IR with $600 annual insurance and $1,500 annual taxes:

    Gross cash flow $343.97 Gross ROI 18%

    add in 15% for vacancy and maintenance:

    Cash flow $193.97 and ROI 10%

    Now add in Capex of say 5%

    Cash flow now $143.97 and ROI 8%

    For this example did the property go from a good one to a bad one?  What else can someone add to this formula to make the numbers less attractive?  There are companies who dont even use the estimated $5k in closing cost into their formula!!!

    When someone says they want a home to cash flow say $300 but want all of these additional expenses into the formula, then this home would have to rent for $1,225.  I think if someone is looking for turnkey and to expect these numbers will be looking forever as your not going to find this from TK providers.

    Curt Davis - KAIZEN Realty538 Reviews
    WebsiteView Page
    3Reply
  • Adam Bird
    Investor · Grosse Pointe, MI · Member since 2016 · 35 posts · 3 votes
    10y

    Hi @Joseph M. - let's connect to discuss further!

    0Reply
  • Joseph M.
    OP
    Investor · Boulder, CO · Member since 2015 · 118 posts · 16 votes
    10y

    @Curt Davis That has been my opinion as well. Would be interested to see what other have to add.

    0Reply
  • Gary Hall
    Investor · Muskegon, MI · Member since 2015 · 35 posts · 16 votes
    10y

    You make your money on the buy. If you buy right you will continue to make those returns barring some economic down turn in that area. We manage a few long term portfolios that make very nice returns. 

    0Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    10y

    @Curt Davis  "There are companies who dont even use the estimated $5k in closing cost into their formula!!!"

    Of course you are correct, but closing costs are a one time expenditure and to discount all of it year after year against the ROI is not good accounting principles. *IF* you wish to use cost accounting for every nickel, it should be amortized over the 27yr class life of the investment. Otherwise, you can get overly conservative and talk yourself out of an otherwise viable class-c investment.

    Personally, I elect to treat is as the "anti-up" cost to enter the poker game and thus my ROI is an actual year/year result.

    0Reply
  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    10y

    In some markets yes (although it's not easy and you probably need to be in a bit lower end areas). In some markets, technically yes, but for all intents and purposes, no.

    Podcast Guest on Show #121
    0Reply
  • Joseph M.
    OP
    Investor · Boulder, CO · Member since 2015 · 118 posts · 16 votes
    10y

    @Gary Hall Do you sell turnkey rentals?

    0Reply
  • Richard Dunlop
    Investor · Detroit, MI · Member since 2014 · 755 posts · 462 votes
    10y
    Originally posted by @Joseph M.:

    @Adam Bird Is there a specific turnkey provider in Detroit that you recommend?

    I do believe he recommends himself.

    I don't know him and have no reason to say anything negative about his operation.

    I just don't think Turn Key is the way to go in Detroit.

    It takes more than a property manager to be successful in Detroit.

    0Reply
  • Curt DavisBusiness Member
    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    10y

    @Jeff B.

    I agree about your logic for the closing cost but could the same thing not be said about the down payment?  Putting down 20% is also the cost to get into the deal with conventional financing.  I am not saying how one company comes up with figures is better or worse then how someone else does it.  

    The only thing I am doing when advertising a home for sale is I provide what I feel are the simple gross figures but tell investors to factor in their own vacancy and repairs. 

    Thanks for your input!~

    Curt Davis - KAIZEN Realty538 Reviews
    WebsiteView Page
    0Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    10y
    Originally posted by @Curt Davis:

    @Jeff B.

    I agree about your logic for the closing cost but could the same thing not be said about the down payment?  Putting down 20% is also the cost to get into the deal with conventional financing. 

    The down payment is used to calc the cash/cash return;

    1. NOI / Down Payment

    so that is such a critical metric, we all want to see the result.  To me, the cash/cash return is my primary evaluation number.

    1Reply
  • Richard Dunlop
    Investor · Detroit, MI · Member since 2014 · 755 posts · 462 votes
    10y
    Originally posted by @James Wise:
    Originally posted by @Richard Dunlop:
    Originally posted by @CK Hwang:

    I would say yes, but the bigger question is at what risk? what is your tolerance for risk? As I tell my clients who eye the 15-25% returns in markets like Detroit and upstate NY, it's not whether the returns are there... the question really is whether the risks are worth it to them. 

     We don't work that cheap!

    Rented for $600 0% Vacancy.

     4 year tenant was in it when I bought it.

     Gotta call you out on this one Rich. What is the point of the post? Working up to a sales pitch or something?....

    No sales pitch. I am a pro member and have posted a total of only 1 ad ever:

    HERE And I got way more response than I anticipated BP Works!

    and the point of the post is I defend Detroit when it is used in a pejorative way.

    When posters say or imply "That only Stupid people invest in Detroit" I respond by implication "that only Stupid people don't"

    But to avoid hijacking this thread I will answer your questions in detail in the:

    Defending Detroit Thread HERE

    1Reply
  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    10y

    The Harvard Endowment Fund I think does better than 15% and Buffet too. Havard has around 12% in RE and about half of that is land/resources. Their 2nd largest stock holding is in cemeteries/furneral homes. A couple billion in that I think. The tenants are long term.

    @Joseph M. BPs calculator can enter those factors.

    1Reply
  • Travis Sperr
    Lender · Denver, CO · Member since 2009 · 1k+ posts · 597 votes
    10y

    Depends on your cash in. I have seen and used a 6% net return on the value of the portfolio of long term $2MM in free and clear real estate would yield $120k annually.

    This might be a little conservative depending on your market.

    0Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    10y
    Originally posted by @Travis Sperr:

    Depends on your cash in. I have seen and used a 6% net return on the value of the portfolio of long term $2MM in free and clear real estate would yield $120k annually.

    This might be a little conservative depending on your market.

     BOY does this make my 95k down payment returning 50k net annually look great!

    1Reply
  • Travis Sperr
    Lender · Denver, CO · Member since 2009 · 1k+ posts · 597 votes
    10y

    @Jeff B. Every deal is different - I bought a handful of houses with less than 10K out of pocket that returned almost 100% cash on cash in year one. So even better every year. 

    Great job on that one, doesn't take too many of those.

    0Reply
  • Andrey Y.
    Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes
    10y
    Originally posted by @Joseph M.:

    I am currently setting up my goals and would like to be realistic in my projected returns, because a couple of percentage points make such a huge difference.

    My goal is to use $60K of my own cash from income or to use equity in my properties to buy 1-2 properties per year using leverage. If I use a 15% (in cash flow only) annual return on my new investments, at age 40 (11 years from now), I would have $1.68 Million, and at age 50, over $8 Million. These numbers are not adjusted for inflation and also don't include appreciation and loan pay down.

    Has anyone been able to consistently average a 15% return long term on their cash using leverage?

     Which city/state were you looking to purchase the properties?

    0Reply
  • James Messa
    Investor · Richmond, TX · Member since 2014 · 58 posts · 13 votes
    10y

    @Curt Davis

    I used 7% vacancy and 5% for maintenance for my evaluation. Is this good?

    0Reply
  • Curt DavisBusiness Member
    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    10y

    @James Messa

     From what I have seen and what several other people use I would say you are close.  

    Curt Davis - KAIZEN Realty538 Reviews
    WebsiteView Page
    0Reply
  • Joseph M.
    OP
    Investor · Boulder, CO · Member since 2015 · 118 posts · 16 votes
    10y

    @Andrey Y. I live in NJ, but I am open to other areas. Ideally within an 8 hour drive.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free