When to start calculating COC vs ROI?

Question

Hello!

So I've been running numbers on a rental property where the ROI is fantastic (80%) but the COC isn't so hot (5%).

At what point would it be wise to focus more heavily on COC vs ROI?

I'm also learning the BRRRR Method, so not sure if/ how COC factors into that if we are getting our money back after we rent it out?

Thanks in advance for your insights!

Adam Gollatz · Answer

Something doesnt sound right to me. If your ROI is 80%, your cash on cash should be much higher due to leverage, unless you have some sort of insanely high interest rate.

Mind sharing your numbers? Feel free to message me.

Joe Villeneuve · Answer

Since CoCR is only measured during the first year, based on the initial cash you put into the deal, you should start measuring it immediately.

Also, ROI is a mixture of actual profit and a variety of imaginary, hopeful financial gains.  Personally, I would leave your ROI calculation where it belongs...with your stock market investments.  ROI is a valid measurement, but it reduces REI to the most basic and risky returns estimates.  It depends on future events you have no control over.

Basing your financial gains on cash return measurements, no only is more concrete, but it allows the REI to take full advantage of all the reasons why REI is far superior an investment than any other.

Kenneth Garrett · Answer

@Joe Villeneuve

Good point Joe.  I use more CoC calcs then ROI.  I will use ROI as a metric when I sell.

Adam Gollatz · Answer

If this deal is only producing 200 to cover vacancy, repairs, and PM, Id run away. Even though you dont have to use PM's and repairs and vacancy arent bills you pay every month, they are very real expenses when they come up. You have to factor them in or you're just buying a liability.

Thuy Pham-Satrappe · Answer

@Adam Gollatz the $250 takes into consideration the interest from the HELOC, so the $200 is what's left over after PITI, a "what if" fund for vacancies, repairs,  etc.,  and PM fees.

I suppose it doesn't really apply for me to do a COCR calculation if I'm using borrowed money- I'm just so used to doing it at part of my numbers crunching!

Thanks!

Adam Gollatz · Answer

Idk where to start wth this one...

Is 50k the entire purchase amount? If so, I wouldn't treat the heloc as cash for calculation purposes. Its really just a 100% ltv loan in which cash there is no cash involved and your CoC would be infinite for all deals, which doesnt help compare. Instead I would look at cap rate.

Just curious, is the 250/mo payment youre calculating on your heloc interest only or paying back the principal and interest?

Thuy Pham-Satrappe · Answer

@Adam Gollatz maybe I'm getting my numbers mixed up.

If I take out a $50,000 loan from my HELOC to purchase a property, my monthly payment is approx $250. The property cash flows $200 (after expenses including the cost of the loan)

ROI (monthly):  $200/$250= 80%

COC (annually): ($250 × 12)/ $50,000= 4.8% (I rounded up to 5% for simplicity)

What am I missing or miscalculating?

Kenneth Garrett · Answer

@Thuy Pham-Satrappe

Your ROI and CoC could be the same in this case.  For example if I put in $12,000 of cash into a project and it cash flows $500 a month my CoC return as well as ROI is 50%.  After 2 years it is infinite because you have all your money back.  When you sell the property you can very your ROI on the project.  $100,000 purchase and you sell for 150,000 the simple ROI is 50% but then you can add in net profit or cash flow over the time you owned it.  Say it returned the same $50,000 plus net cash flow for 5 years of $6000 per year you would add the 30K back in so now your at 130,000 on your 150,000 or a total ROI on the project of 87%.

You can make this as complicated as you want but in simple terms the two can be very similar when you are using cash.  If you have no cash in the project CoC is irrelevant but your ROI is your cash flow.

When to start calculating COC vs ROI?

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