Rental Property Investor · Omaha, NE · Member since 2019 · 32 posts · 9 votes
For my first buy and hold property I am trying to find something with 6-8% cash on cash ROI. That seems like it should be fairly doable, but there are a lot of opportunities I've seen that would generate around 4-5% ROI. I'm wondering if I should be more flexible and consider some of the lower ones, since I have not even been taking into account the ROI from debt pay down in my calculations.
I really want to get started with something because I'm afraid I will get analysis paralysis if I shoot too high for my first property.
What are your thoughts? What would you recommend for a cash on cash ROI goal for a newbie's first property?
You're focusing on the wrong thing. Stop focusing on getting your first deal, or all you're going to get is your first property. They're not the same thing. If your son/daughter came to you and asked you if it was OK to accept a "C" for a grade in their first class in High School, because they were in a hurry to get it over with, what would your response be to the?
Your goal isn't to accumulate properties...it's to accumulate deals.
You don't get a second chance, to establish your starting point with your funds.
You're focusing on the wrong thing. Stop focusing on getting your first deal, or all you're going to get is your first property. They're not the same thing. If your son/daughter came to you and asked you if it was OK to accept a "C" for a grade in their first class in High School, because they were in a hurry to get it over with, what would your response be to the?
Your goal isn't to accumulate properties...it's to accumulate deals.
You don't get a second chance, to establish your starting point with your funds.
Hi Daniel, I'm not sure what your financial situation is so I can't speculate on what you should do. I am starting out as well I am am looking to make a higher CoC return because my goals are to scale faster vs. finding a safe stable return with low risk. Your level of acceptable risk should determine your level of return expected. I won't jump into a deal where the numbers are so tight to eek out a small return. If you are calculating conservatively and the 4-5% is your downside if the deal goes bad, then that may be OK for you. For me, I want 10-12% CoC return to be my downside because I'm just starting out. I hope that makes sense.
I was going to post exactly what Joe already said above. I would rather have no property than a bad property. The truth is owning property is a pain in the butt, if it's not a good deal that cash flows, there's really no point in having it.
That makes sense. The specific property that I am looking at now seems like I would be able to get just under 6% CoC ROI with what I consider very conservative numbers. I think it would get closer to 7% if things went according to plan. Monthly cash flow would be just under $200 with conservative numbers.
My concern with what I called analysis paralysis is that in the market I am working in, the high ROI deals either don't exist or get snatched up way too fast, some that I have been looking into seriously have gone under contract in hours of going on the market. Maybe I need to switch to off market marketing campaigns or switch to a cooler market, but if I stay with on the market properties it seems that more seasoned investors (or retail buyers who don't care about the numbers as much) will be sweeping up all the good inventory.
That makes sense. The specific property that I am looking at now seems like I would be able to get just under 6% CoC ROI with what I consider very conservative numbers. I think it would get closer to 7% if things went according to plan. Monthly cash flow would be just under $200 with conservative numbers.
My concern with what I called analysis paralysis is that in the market I am working in, the high ROI deals either don't exist or get snatched up way too fast, some that I have been looking into seriously have gone under contract in hours of going on the market. Maybe I need to switch to off market marketing campaigns or switch to a cooler market, but if I stay with on the market properties it seems that more seasoned investors (or retail buyers who don't care about the numbers as much) will be sweeping up all the good inventory.
"If the Market doesn't fit, you must quit"...that market that is.
Your numbers are telling you something..."don't do it". The numbers never lie...don't argue with them. You will lose.
What you're experiencing isn't "analysis paralysis". What you're experiencing is your analysis doing it's job.
@Joe Villeneuve what do you suggest for CoC ROI for new investors? I don't think 6% is horrible, especially since I'm not including debt pay down in that, but I'd like to hear what you think.
CoCR doesn't include debt paydown, since it isn't in the form of cash.
Look at it this way, you really aren't making a profit until you recover all the cash you put in. Let's just assume only the DP for a moment.
If you put 20% down on a $100k property, you'd be out of pocket $20k...and would need to recover that cash, in the form of cash, before you started to make a profit.
If you were only making 6% CoCR, and after the first year you maintained that same cash return through your cash flow per year, you would be getting back a whopping $1200/year. or $100/month. That means it would take you, all things being perfect, almost 13 years to recover your cash.
I can pretty much guarantee that your will be replacing expensive items (CAPEX) at least twice during that time period. If the big expenses were around $10k each, that would add an added 13 years to recover that cash, and this repeats, so you never catch up.
The dollars (not percentages) you need to make, and use for analysis, must be based on your plan requirements...NOT some arbitrary number that you adjust as you go to make a property work.
Your not going after properties...you're going after deals. Big, BIG difference. Let the numbers with $$$$ in front of them dictate the properties you buy...not the numbers with "%" in front. The percentage numbers really don't tell you anything important...since you can't spend a percentage.
Thanks for the advice. The only thing that I would point out is that I am already budgeting for CapEx, repairs, vacancy, etc. In other words, that 6% return and cash flow that I mentioned already takes into account big purchases like roof, furnace, etc.
Does that change your opinion of the property? I doubt my calculations are perfect (no one's ever are) but I try to be very conservative with all my assumptions.
Thanks for the advice. The only thing that I would point out is that I am already budgeting for CapEx, repairs, vacancy, etc. In other words, that 6% return and cash flow that I mentioned already takes into account big purchases like roof, furnace, etc.
Does that change your opinion of the property? I doubt my calculations are perfect (no one's ever are) but I try to be very conservative with all my assumptions.
I really appreciate the feedback
How much, in dollars not %, are you putting away per month for CAPEX, repairs, etc...?
5 - What items on the list of questions will you be able to cover based on #'s 1 - 4? 6 - What if you can't cover an item...let's say you have to replace the roof 8 months in. Will you be able to replace a roof for $1600...assuming you have that much accumulated at that time, and you didn't have anything else come up that took part (or more) of these funds away before you needed them for the roof?
I see what you are saying and understand $200 will not be enough to cover what you mentioned.
Then again, every investment has risk involved and I don't think anyone would be able to survive if they had to, for example, replace a roof every 8 months for every property they own.
I'm not saying I know the lifespan of all of these bigger item expenses to a tee or that I can forecast everything that will happen (I am just a little newbie), but my idea behind the way I am budgeting for these bigger expenses is that they should be mostly covered in the long term, given their life expectancies. If I have to replace them all right away that will be a big hit, but I shouldn't have to replace them again for a few years. Putting money away will chip away at that hit I took over time, but like you said $200 probably isn't enough.
With all that said, what type of CoC ROI, Cash flow in dollar value, or whatever other metrics would you suggest a newbie like me use for a hard line in the sand when evaluating deals?
There are so many variables that come into play when trying to answer that question.... either way... you should be looking at a higher CoC return. 5-6% is pretty rough. If you were looking for 11-12% but found one that would yield 10% that's a different story. Aim higher.
Sorry, my previous post wasn’t that clear. If you’re going to aim for 6-8% and you’re comfortable in that range, remain steadfast with those numbers. If you bump your goal up in the 11-12% range I think you have a little more wiggle room.
There are many different ways to look at your return on your investment. Using percentages can be misleading as 10% on $100 is $10 vs a 10% return on $1000 where you are looking at $100. Figure out your down payment, monthly expenses including setting aside money for repairs and then what you can rent it for. For buy and hold rentals, the part that rarely gets mentioned is the fact that the tenants are paying down your mortgage.
Find a place that works for you, don't try to make the numbers work-be honest.
You're focusing on the wrong thing. Stop focusing on getting your first deal, or all you're going to get is your first property. They're not the same thing. If your son/daughter came to you and asked you if it was OK to accept a "C" for a grade in their first class in High School, because they were in a hurry to get it over with, what would your response be to the?
Your goal isn't to accumulate properties...it's to accumulate deals.
You don't get a second chance, to establish your starting point with your funds."
You're focusing on the wrong thing. Stop focusing on getting your first deal, or all you're going to get is your first property. They're not the same thing. If your son/daughter came to you and asked you if it was OK to accept a "C" for a grade in their first class in High School, because they were in a hurry to get it over with, what would your response be to the?
Your goal isn't to accumulate properties...it's to accumulate deals.
You don't get a second chance, to establish your starting point with your funds."
When you accept less of a return (profit, cash flow) on a property, because you are more focused on getting the property instead of the deal, you are negotiating against yourself because your focus is on getting the property...not getting the deal (making money).
We have been looking for an additional property to add to our buy/hold portfolio and experience the same thing that the OP mentioned. ie, they get snatched up fast or they just don't have numbers that work. So we're still looking and just won't buy until it's a good deal. If it takes another half a year to find one, so be it. It's a pretty tough time to find a "deal" in the seller's market here in the middle Georgia area. Reserves and margins are important. We've had to install completely new HVAC systems in 4 of 8 properties within the first 2 years we owned them. 4K to 5K each. Have a few properties that need roofs. Capex expenses can eat your lunch if they occur prior to building that fund up so don't underestimate potential big expenses sooner rather than later.