So, what is a COCROI?⁣

[Kyle Curtin]

Cash on Cash Return on Investment (COCROI) is a very common metric that re investors use to determine the projected return on a property, and is expressed as a percentage. It is the measurement of return on the total cash invested. This % can be compared to returns from other asset classes like the stock market, bond market, crypto, etc.⁣

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Happy Monday guys! 😁⁣

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#househack #massachusettsrealestate #realestateinvestor⁣

#Gardner #leominster #worcester #massrealestate #multifamily #realestateinvesting #Candorealty #realestateagent #realtor #investor #assets #cashflow #Lowell #Boston #Duplex #Triplex #Quadplex #smallcommercialmultifamily #commercialmultifamily

[Mary Smith]

This was really helpful, thank you!

[Joe Villeneuve]

You left out a very important part.  It only measures the first year.  Total cash in, and first year cash return.  I measures how much cash you recover in your first year ONLY.

[Nathan Gesner]

@Joe Villeneuve, do you recommend people use return on equity as the better metric?

[Lesley Resnick]

The other problem with COC is that it is easily manipulated. What is the COC on a house you pay cash for vs a house you finance? The cash in for the first example is clearly higher, but is it better deal? If you renovate the property in year one, what does the COC look like? What if you leve the building vacant for 6 months while doing the reno? Don't do anything, delay all maintenance, COC looks great. If you are someone likes to consider, cap ex, repairs, reserves and vacancies, COC falls apart there as well.

There are very few REAL number in real estate.  The rest are derived from the REAL numbers and even those become less meaningful over time.  I like gross rent multiplier, how much the property produces compared to its costs.  It allows a comparison of the performance of dismissal assets.  The second number I like, is how much do you have left after paying actual expenses, not the "could be" expenses.  It is difficult to normalize future expenses on an old building vs a new one.  

The last part is a little squishy, what is the area like?  The more depressed and rough the area, the higher the return. Ocean front real-estate generally has horrible cash flow.   

[Joe Villeneuve]

Quote from @Nathan Gesner:

@Joe Villeneuve, do you recommend people use return on equity as the better metric?

Yes.  Knowing how much of my cost (cash) I'm getting back within a year of purchase is important.

[Joe Villeneuve]

Quote from @Lesley Resnick:

The other problem with COC is that it is easily manipulated. What is the COC on a house you pay cash for vs a house you finance? The cash in for the first example is clearly higher, but is it better deal? If you renovate the property in year one, what does the COC look like? What if you leve the building vacant for 6 months while doing the reno? Don't do anything, delay all maintenance, COC looks great. If you are someone likes to consider, cap ex, repairs, reserves and vacancies, COC falls apart there as well.

There are very few REAL number in real estate.  The rest are derived from the REAL numbers and even those become less meaningful over time.  I like gross rent multiplier, how much the property produces compared to its costs.  It allows a comparison of the performance of dismissal assets.  The second number I like, is how much do you have left after paying actual expenses, not the "could be" expenses.  It is difficult to normalize future expenses on an old building vs a new one.  

The last part is a little squishy, what is the area like?  The more depressed and rough the area, the higher the return. Ocean front real-estate generally has horrible cash flow.   

 There are no problems with the use of CoCR as a metric.  You just have to know it only measures cash in/out in year 1.

As far as the rest of what you wrote , the CoCR of a house you paid all cash vs financed will be dramatically different.  That's the purpose of this metric.  The cash you put in is your cost.  So if you paid all cash you paid full price for a property.  If you put down 20%, then you only paid 20% of the purchase price for the property.  This means the lower your cost (cash), the faster you get it back, which then means the faster you are to profitability.

[Kenneth Garrett]

COC is the metric based on the first year. But you can extend it out until all of your cash is returned. I believe the goal is to get your cash back and reinvest in another project. This method allows you to reuse the same capital.

If you finance the property, your tenant is paying your expenses and your cash flow after your return of equity as a return is infinite. You have all of your capital back.

[Nathan Gesner]

Quote from @Joe Villeneuve:

Quote from @Nathan Gesner:

@Joe Villeneuve, do you recommend people use return on equity as the better metric?

Yes.  Knowing how much of my cost (cash) I'm getting back within a year of purchase is important.

What I mean is, do you use ROE as an on-going metric?

In the first year, the only thing invested is the money you put in. Each year after that, you have the original money invested, cashflow, appreciation, and other "benefits" that increase the amount of money invested. It doesn't make sense to calculate a return based solely on the original cash invested while ignoring equity, cashflow, etc. 

I need to write up a cheat-sheet demonstrating why investors should evaluate their ROE every year. At a certain point, the return drops low enough that they should sell the property and reinvest in a new property (or properties) that will increase the return dramatically.

[Joe Villeneuve]

Quote from @Nathan Gesner:

Quote from @Joe Villeneuve:

Quote from @Nathan Gesner:

@Joe Villeneuve, do you recommend people use return on equity as the better metric?

Yes.  Knowing how much of my cost (cash) I'm getting back within a year of purchase is important.

What I mean is, do you use ROE as an on-going metric?

In the first year, the only thing invested is the money you put in. Each year after that, you have the original money invested, cashflow, appreciation, and other "benefits" that increase the amount of money invested. It doesn't make sense to calculate a return based solely on the original cash invested while ignoring equity, cashflow, etc. 

I need to write up a cheat-sheet demonstrating why investors should evaluate their ROE every year. At a certain point, the return drops low enough that they should sell the property and reinvest in a new property (or properties) that will increase the return dramatically.

My metrics are simple.  There are only 3:
1 - CoCR.  I want to know how much of my cost I get back within a year.  This allows me to take that same cash and move it forward again.
2 - Payback Ratio.  This tells me how long it will take to recover all of my cost.  This number (of years) may change if/when I put more cash into the deal after the DP, like negative CF, repairs (paid out of pocket), etc...
3 - Equity at start to double equity at start.  This tells me when to sell because it is at this point, along with my recovery of cost (cash) that the property is at its maximum value, and starts to lose money from that point forward.

[Steve Vaughan]

Quote from @Nathan Gesner:

What I mean is, do you use ROE as an on-going metric?

I need to write up a cheat-sheet demonstrating why investors should evaluate their ROE every year. At a certain point, the return drops low enough that they should sell the property and reinvest in a new property (or properties) that will increase the return dramatically.

 Yes, sell or refinance and redeploy if deals are a plenty.   We can also run the duration on depreciation.   Most are optimally deprecated by year 17.

Looking back, as values rose so much, my ROE minimum dropped to a pittance (7% self-managed, 6% with a PM). My min  used to be 8-9% at least.

When I was only getting about 5.3% ROE with a PM I tapped out as risk-free easy yields rose to 4%, deals dried up to exchange into and I was facing cap ex. 

[Joe Villeneuve]

Quote from @Steve Vaughan:

Quote from @Nathan Gesner:

What I mean is, do you use ROE as an on-going metric?

I need to write up a cheat-sheet demonstrating why investors should evaluate their ROE every year. At a certain point, the return drops low enough that they should sell the property and reinvest in a new property (or properties) that will increase the return dramatically.

 Yes, sell or refinance and redeploy if deals are a plenty.   We can also run the duration on depreciation.   Most are optimally deprecated by year 17.

Looking back, as values rose so much, my ROE minimum dropped to a pittance (7% self-managed, 6% with a PM). My min  used to be 8-9% at least.

When I was only getting about 5.3% ROE with a PM I tapped out as risk-free easy yields rose to 4%, deals dried up to exchange into and I was facing cap ex. 

Deals are always there.  Deals are not found, they are made.  The makeup is in two parts:
1 - Lowest Cost to the REI (which is exclusively the cash they put in)
2 - The terms of how someone/something else pays for the rest.
How this is accomplished has more to do with the strategy used than the actual purchase price.

...and refinancing isn't nearly the same thing as selling to move equity forward.  When you refi you're not accessing anywhere near as much of the equity as you do when you sell.  Also, when you refi, your mortgage payment goes up, so your cash flow goes down.  Not so when you sell.  When you refi you're NOT accessing your money again.  You're buying new money from the bank.  If it was your own money again, you wouldn't have to pay for it (interest).

[Steve Vaughan]

Quote from @Joe Villeneuve:

Quote from @Nathan Gesner:

Quote from @Joe Villeneuve:

Quote from @Nathan Gesner:

@Joe Villeneuve, do you recommend people use return on equity as the better metric?

My metrics are simple.  There are 3: 

1 - CoCR.  I want to know how much of my cost I get back within a year.  This allows me to take that same cash and ve it forward again.

2 - Payback Ratio.  This tells me how long it will take to recover all of my cost.  This number (of years) may change if/when I put more cash into the deal after the DP, like negative CF, repairs (paid out of pocket), etc...

3 - Equity at start to double equity at start.  This tells me when to sell because it is at this point, along with my recovery of cost (cash) that the property is at its maximum value, and starts to lose money from that point forward.

 I like your #3.  When to sell isn't discussed enough.   90+% when to buy...

I know you also factor in cap ex. Maybe like a 7 year hold to avoid cap ex for roofs and mechanicals. All of my SFR rental sales over the years pretty much needed new roofs and hvacs and I was able to sell for less of a discount (about 50%) than would've costed for me to have done so I completely agree.

Another big factor of my when to sell was when the value reached replacement or rebuild cost as estimated by my insurance policy.   I remember buying a 7-unit building in '05 for $345k and the min insurance replacement was $800k.  I said to myself then, i will consider selling this when market value = replacement. 

In this real life example, I sold it this March for $1.125M.  My sales price exceeded insurance 'value'. Market out of whack.  Cost to replace should factor in sale or not decision probably. 

[Joe Villeneuve]

Quote from @Steve Vaughan:

Quote from @Joe Villeneuve:

Quote from @Nathan Gesner:

Quote from @Joe Villeneuve:

Quote from @Nathan Gesner:

@Joe Villeneuve, do you recommend people use return on equity as the better metric?

Yes.  Knowing how much of my cost (cash) I'm getting back within a year of purchase is important.

What I mean is, do you use ROE as an on-going metric?

In the first year, the only thing invested is the money you put in. Each year after that, you have the original money invested, cashflow, appreciation, and other "benefits" that increase the amount of money invested. It doesn't make sense to calculate a return based solely on the original cash invested while ignoring equity, cashflow, etc. 

I need to write up a cheat-sheet demonstrating why investors should evaluate their ROE every year. At a certain point, the return drops low enough that they should sell the property and reinvest in a new property (or properties) that will increase the return dramatically.

My metrics are simple.  There are only 3:
1 - CoCR.  I want to know how much of my cost I get back within a year.  This allows me to take that same cash and move it forward again.
2 - Payback Ratio.  This tells me how long it will take to recover all of my cost.  This number (of years) may change if/when I put more cash into the deal after the DP, like negative CF, repairs (paid out of pocket), etc...
3 - Equity at start to double equity at start.  This tells me when to sell because it is at this point, along with my recovery of cost (cash) that the property is at its maximum value, and starts to lose money from that point forward.

 I like your #3.  When to sell isn't discussed enough.   I know you also factor in cap ex.  Maybe like a 7 year hold to avoid cap ex for roofs and mechanicals.

A big factor of my when to sell was when the value equalled replacement or rebuild cost as estimated by insurance.   I remember buying a building for $345k and the min insurance replacement was $800k.  I said to myself then, i will consider selling this when market value = replacement. 

In this real life example, I sold it this March for 1.125M.  My sales price exceeded insurance 'value'. Market out of whack.  Cost to replace should factor in sale or not decision probably. 

I don't factor in capex in the formula because doing so is an illusion.  It doesn't work.  You can't cover much of anything taking a percentage of rent/CF out to cover CAPEX (plus other ???) unless you take out a huge percentage (which destroys good deals), or pray that you don't need to tap into it for at least 7-8 years.  I'm sold before that.

Your biggest CAPEX is the roof.  If I see the roof will need to be replaced within the next 5-7 years, I have it replaced when I buy...because it's free to me.  If I wait until I have to replace it, say 5 years, the cost comes out of pocket...which means it adds to my cost of the property.  If I replace it when I buy, I can have the seller do it first, and I increase the price of the property equal to the cost of the roof (plus $1000 as an extra incentive to do so).  Doing it this way means the tenant is buying the new roof for me.  The mortgage payments goes up (usually about $25/month...$300/yr), so if I sell in 3 years, the roof cost me $900 in reduced CF (not the same as paying in cash upfront).  Now, when I can put "new roof within the last 4 years" on my sales description, do you think I can sell that property for at least $900 more?  Free roof.

[Steve Vaughan]

Quote from @Joe Villeneuve:

Quote from @Steve Vaughan:

 Yes, sell or refinance and redeploy if deals are a plenty.   We can also run the duration on depreciation.   Most are optimally deprecated by year 17.

Looking back, as values rose so much, my ROE minimum dropped to a pittance (7% self-managed, 6% with a PM). My min  used to be 8-9% at least.

When I was only getting about 5.3% ROE with a PM I tapped out as risk-free easy yields rose to 4%, deals dried up to exchange into and I was facing cap ex. 

Deals are always there.  Deals are not found, they are made.  The makeup is in two parts:

1 - Lowest Cost to the REI (which is exclusively the cash they put in)

2 - The terms of how someone/something else pays for the rest.

How this is accomplished has more to do with the strategy used than the actual purchase price.

...and refinancing isn't nearly the same thing as selling to move equity forward.  When you refi you're not accessing anywhere near as much of the equity as you do when you sell.  Also, when you refi, your mortgage payment goes up, so your cash flow goes down.  Not so when you sell.  When you refi you're NOT accessing your money again.  You're buying new money from the bank.  If it was your own money again, you wouldn't have to pay for it (interest).

 I've always agreed deals are made.  At some point though the effort/reward ratio gets too high.  What used to be 100 rocks to convert becomes 200.  

There are also more costs and pain to sell vs refi.  I wish it was like a mutual fund and you just hit the sell button, but it will cost 8% of SP and 45 days of indigestion.   Also have to factor taxes.    But I get what you're saying. 

[Joe Villeneuve]

Quote from @Steve Vaughan:

Quote from @Joe Villeneuve:

Quote from @Steve Vaughan:

Quote from @Nathan Gesner:

What I mean is, do you use ROE as an on-going metric?

I need to write up a cheat-sheet demonstrating why investors should evaluate their ROE every year. At a certain point, the return drops low enough that they should sell the property and reinvest in a new property (or properties) that will increase the return dramatically.

 Yes, sell or refinance and redeploy if deals are a plenty.   We can also run the duration on depreciation.   Most are optimally deprecated by year 17.

Looking back, as values rose so much, my ROE minimum dropped to a pittance (7% self-managed, 6% with a PM). My min  used to be 8-9% at least.

When I was only getting about 5.3% ROE with a PM I tapped out as risk-free easy yields rose to 4%, deals dried up to exchange into and I was facing cap ex. 

Deals are always there.  Deals are not found, they are made.  The makeup is in two parts:
1 - Lowest Cost to the REI (which is exclusively the cash they put in)
2 - The terms of how someone/something else pays for the rest.
How this is accomplished has more to do with the strategy used than the actual purchase price.

...and refinancing isn't nearly the same thing as selling to move equity forward.  When you refi you're not accessing anywhere near as much of the equity as you do when you sell.  Also, when you refi, your mortgage payment goes up, so your cash flow goes down.  Not so when you sell.  When you refi you're NOT accessing your money again.  You're buying new money from the bank.  If it was your own money again, you wouldn't have to pay for it (interest).

 I've always agreed deals are made.  At some point though the effort/reward ratio gets too high.  What used to be 100 rocks to convert becomes 200.  

There are also more costs and pain to sell vs refi.  I wish it was like a mutual fund and you just hit the sell button, but it will cost 8% of SP and 45 days of indigestion.   Also have to factor taxes.    But I grt what you're saying. 

It all comes down to the strategies you use when your cash is entering and exiting.

[Doug S.]

Is this accurate and/or useful? 

Cash-on-Cash Yield = Annual Net Cash Flow / Invested Equity

For example, if an apartment priced at $200,000 generates monthly rental income of $1,000, the cash-on-cash yield on an annualized basis would be: 6% ($1,000 * 12 / $200,000 = 0.06).