Twin Cities area Cash on Cash return

[Davey McLaughlin]

Hello, I wanted to reach out and ask for the advice of other investors in the twin cities area what their target percentage for a Cash-on-cash return is when they purchase rental properties. (Specifically small multi-family) Thanks!

[Evan Kraljic]

My target COC return is dependent on what kind of financing I'm using, and can be a moving target depending on other workings within the deal. An extreme example Brandon Turner used to talk about was that if you're cash flowing $1/month but have no money in the deal you have an infinite COC/return, but it's still probably a bad deal if you're returns and overall margin is so small, then it's just not worth your time. This comes into play a lot when you're looking at a low down payment option like househacking vs. putting 20% down.

If you're only going to have 20k into a deal with a househack, then a 12% COC return is cash flowing $200/month, which isn't really that much and if you're under estimating any expenses that can go negative in a hurry. So I wouldn't pay too much mind to COC return with a low down payment loan.

Conversely, with a low down payment loan there will be times where you could possibly get a deal with more modest cash flow but if you were able to buy well below market then you can get a pretty nice equity multiple that will far exceed the cash flow you're going to receive. 

For example: Scenario A you put 5% down on 400k property that should be worth 450k. It cash flows 2k/yr, so you're COC return is only 10%, but you captured 50k of equity with just a 20k down payment. Scenario B - you paid market value for a 400k property, but it cash flows 5k/yr. You're COC is much nicer at 25%, but it's only amounting to 3k more/yr vs. scenario A, when in that instance the 50k equity gain is far more important.

So it's a balance for me. If I'm going to be putting down 20-25% then I'd be expecting 12% COC or higher. For househacks, I underwrite them a little differently because the low down payment can real