Hard to find deals that give any positive CoCROI

3 Replies

I just started to practice analyzing deals ( used up the free 5 trials for rental calculator, so basically made an excel using old youtube videos on the 4 block technique figuring out CoCROI. )  What i've realized for my area ( Houston, TX) is basically anything over 130k basically produces 0 or negative CoCROI because ultimately your rent is the total income you get and subtract expenses(which usually adds up to around 700-800 bucks be conservative) and your mortgage(which would be around 500-600 bucks a month for a 100k-130k loan)

most of the homes near Houston average (base on craigslist, rentometer, realtor.com) 1300-1600 on rent for a traditional 3/2 SFH. Which means if i pay anything over 100k (assuming home's move-in ready, with everything function, even throw in a conservative 5000 cosmetic rehab cost) my CoCROI is already in the negatives..In my case my current goal is to move out of apartment renting so i can start owning some equity, so the ROI is not determining my buy, but I just want to know the general consensus on this matter. Is this the reason why people are saying there's almost no good deals right now because unless you can scoop up a home for pennies on the dollar as a fixxer-upper most likely, it's very hard for you get any sort of decent return? (CoCROI)


I’m a little confused by what you’re asking particularly because Cash on Cash Return and Return on Investment are not the same thing. 

You are almost certainly going to have negative COC the first year you own a rental property because it is your total net cash flow for year 1 divided by cash invested. If you bring $10k to closing or you refi and leave $10k in a rental after using hard money, you're not going to profit $10k your first year owning a property, so it's going to be negative. Don't focus on that. If you're a buy and hold investor the negative COC the first year is irrelevant for a SFH. Year 2 and Year 3 are where you make money.

There are PLENTY of rentals available in Houston that cash flow and plenty of “deals” if you know how to make them a deal - they don’t just fall in your lap usually. You just have to know what you’re looking for and have a strategy for acquiring them. I know people that have cash flowing rentals all over the city - sometimes they pay with all cash, sometimes they use hard money, sometimes they use private money, sometimes conventional. You can’t be a one trick pony trying to put 20% down every time in A class markets and wonder why they don’t cash flow. Yes, finding off-market deals that need a rehab (value add) is a good way to find cash flowing properties. You’ll have a higher chance of getting them below market value, rehabbing them to increase the value/bring it to market value, and enjoying some cash flow because you can now charge higher rents for a good quality product relative to what it’s appraised for. 

I think the sweet spot for rentals is anything below $200k in Houston with $130-$150k being the sweet spot (because your mortgage is 75-80% of that and you aim to rent between $1200-$1600). These properties fit the criteria for middle class folks who want an affordable place to live. They’re usually C/D class neighborhoods with blue collar, hard working folks. You can still cash flow on properties above $200k, but your rents are going to be for a more limited amount of people ($2k+ per month). 

@Brian Alfaro thank you so much for your input! Yes, your last paragraph is basically what i was asking. Due to the areas that im looking at mostly max out on rent about 1300-1500 a month. Anything above a certain purchase price (150k-200k) is very hard to have positive cash flow. I guess I need to switch my mindset and not focus on the first year CoCROI because it's mostly likely going to be negative (I think i've watched too many deal analyzing videos that always end up with unrealistic positive first year ROI thus making me think anything not producing positive COC is not a good deal, unless i can get the house for nearly 50% off or something)

(I was mainly focusing on COCRoI when it comes to deals, i understand there's a differencec in CoC vs overall ROI.)

I think in Houston there are still landlord deals to be found but, realistically, you might be looking at a cash-flow breakeven scenario for a couple years (rents will continue to go up), and/or you might have the put a little more down into a deal than you might prefer.  Or maybe some combination of the two.  

So I guess I am agreeing with @Brian Alfaro here in that it really is a long term strategy and you cannot just look at it through the lenses of returns generated the first year.  That is just one metric.  You aren't getting into rentals for just one or two years expecting a life changing event.  Remember your P & I remained fixed, while rents will gradually rise.  All the buy & hold folks say the magic happens over time. 

Go over to Pasadena or Baytown or LaPorte and see if you can pick up some of those little 1300-1500 square feet houses for under $100k.  Maybe you get one for $80k and put $20k-$25k in repairs.  They won't be in livable condition at that price point but it might not be too terribly hard to get them rent ready either.  Try not to over-rehab but if you spend a little more, go over budget a tad, that's not a major problem.  Better to have a solid property that you won't have to revisit later.  

Hey Brian, if you see one of these, you got my number.