One of my goals for 2015 is to buy my first Buy and Hold Rental property. Given the high amount of SFH in in the Minneapolis/St. Paul Metro Area, that's the niche I'm leaning towards.
While I realize each geographic market is vastly different in terms of acceptable cash on cash returns, I'm curious for what benchmarks or rules you have set for your business to ensure long term financial success.
For example, I evaluating a property right now with 11.86% Cash on Cash and that includes 10% vacancy, 12% PM, 5% Cap Ex and 10% Repairs.
Thanks in advance!
"Still wet behind the ears" Mike in Minnesota :)
Just to weigh in - my goal with smaller multi-families is 10% minimum with some prospects for moving it up to 12-15% after a year. Several of these turnkey guys that market through Bigger Pockets are offering SFR's in the 15-17% return range (in Atlanta and Memphis), though, so your 11.86% might be a tiny bit low. Still - looks like you have reasonable cushion built in on your assumptions. The only thing i would question is your 12% for PM. I have not seen anything that high anywhere - traditional SFR PM fees are like 10%. MAke sure these guys aren't taking advantage of you...
I use a minimum of 15% CoC in south west Minneapolis for townhomes.
I look for 25-30%, but I manage my own properties and estimate 7 or 8 % vacancy. Generally I run a fair bit lower on the rate of vacancies with the properties I manage. I figure I can estimate more aggressively when no one has moved out for about 23 months (knock on wood). Take those out and you may be right. Just be careful about the CapEx and repairs estimates. I've mostly newer buildings and have few expenses, but I just bought a quad that has a bunch of deferred maintenance. It's only been a few months, but I'm sure I'm going to be spending 75% of my maintenance and repairs budget on that single building for the next couple years anyway.
10%-15% is normal for single family homes.
25%-30% as @Alan Mackenthun stated he look for most likely only comes from multi family and self managed.
The CoC return is different depending on what kind of loans you are taking out.
I normally plan for 30 yr fixed rate coventional mortgages with 25% downpayment. With that, I am looking for property that will give me about 13% to 15% cash on cash return and a 7% cap rate.
In Minneapolis area, these properties are tough to find at the moment. I am currently looking at a few expired listings that may be close to these ratios and I am going to have to try driving for dollars and sending yellow letters.
Your first property, unless you live far away you should do the property management yourself. 12% is huge chunk to pay for things that you can do yourself. You can call a plumber, you can call a carpenter and you can certainly run an ad on craigslist for free for new tenants and you can certainly run your own credit bureau reports for screenings.
After allowing for soft costs (repairs and vacancy) reserves of 12%, I look for a 12-20% cash on cash return. The higher end is for multis of 2-4 units, lower for SFRs. All investments are passive, so it takes into account the PM costs. By the way, I do have one PM company that is starting to charge 12% for new investors with their turnkey company, which I think is too high.
I don't think we have done a deal under 50% COC return, all but one has been owner occupied to start out with, and hardly any money down. You move a lot, but it pays...
If you hire a property mgr who charges 10 percent of gross rent and 1/2 - 1 month rent for lease up it is going to be closer to 12 percent over time
I look for a minimum 10-12% unleveraged, 15% leveraged and shoot for 20% IRR after a 5-year hold.
I always figure 12% property management - I have a great property manager at 8% - but new leases are always 1/2 first months rent - that is pretty standard in most PMs - so i've averaged it out at 12% to be safe if i have tenants turning over once a year. always be conservative!
Minimum 10-12% COC
Most managers I use charge 10% plus 1 month's rent to find new renter. If the vacancy rate is 5% and it takes 1 month to clean and find new renter the % is 13.8% of gross rents.
My minimum target for cap rate is 8%. My portfolio is 75% equity and use cash for most buys. If you put only 10% down and have loans at 5% your coc rate is 22%.
Hope that helps.
Pardon me if this is a dumb question, but if you are using leverage for both the down payment and the repairs, what is your cash-on-cash return? Infinity? If not, how should I calculate it?
I am looking to utilize a home equity loan or HELOC for down payment + repairs on a rehab buy-and-hold. I have enough equity in my primary residence to carry out this strategy, and I have confirmed w/ a lender that in my personal situation, I would still be within acceptable DTI limits.
NJ Agent # 1542057
I measure my performance slightly differently than others. I try to measure my prerepair cash flow, meaning the amount of money left over before PITI. I try to have this number be between 15% and 20%. If I hit that number, then over my entire portfolio, my likely true cash on cash return is probably going to end up being about 10-12%.
I do this, because as anyone with more than a few properties can tell you....very often you have some properties that have almost no repair and cap ex costs, while you have some properties that suck up all of your money. Trying to envision the costs of an individual property is often a fools game. A large sample size will give you a true picture of things, but a sample size of one will never give you an accurate portrayal of real estate.
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