Looking to get my first rental but struggling to reason about CoC

2 Replies

My cousin is selling her townhouse and she knew I was interested in getting into real estate, so she offered me an awesome deal (or so I thought). She would sell me a $275,000 for $235,000 and all I had to do was cover all of the sale documents and closing costs. 

I ran the numbers over and over, but after the $230 HOA, the CoC looked to be realistically at 5.5% or more optimistically 7.5% if rent hit near the top for that area. These returns are with me personally managing the property.

I have watched web presentations on this site and listened to podcasts about how to get started, and that CoC return just doesn't seem to be high enough. Obviously the 40k of free equity here is amazing, but an optimistic CoC of 7.5% ended up feeling so low for dropping 53.5k to get in the door. I ended up NOT going with the deal.

Is there a CoC value that is widely considered to be good for investment properties? Some simple googling says 8% is considered ok, but lower than that is not worth the effort.

PS: Here is a link to the numbers involved in the deal: https://i.imgur.com/f1iEzcv.png

The answer is "It depends":

1. Neighborhood / location - A/B/C?

2. Stability / reserves of the HOA & whether they have rental restrictions. Any special assessments coming up?

3. Future growth of the neighborhood

4. Are you taking all expenses into account for your CoC calculation such as vacancy, maintenance, property tax, insurance etc.?

5. What are the comps (sale price) & rental in the area?

Also CoC is a static & point-in-time metric. It basically helps you to gain confidence that in the near short-term assuming you hit your rental price assumption, you will not lose money. The more important metric over a 10+ year period is IRR.

By itself, for a SFR (or TH), your CoC is in line with the market perhaps even on the higher side if you hit 7.5% CoC. Remember, generally speaking, high CoC = higher risk (B- or C class neighborhoods) - that's why I emphasized to look at CoC side by side with IRR.

1. Neighborhood / location - A/B/C?

Not sure. I would guess a B or B-? Is there criteria around this?

2. Stability / reserves of the HOA & whether they have rental restrictions. Any special assessments coming up?

Undisclosed. The HOA just changed hands, so the documents were "not available" at this time (estimated 2 week delay).

3. Future growth of the neighborhood

The area is quite old at this point. Probably 40 years at least. It is in a fairly nice area though

4. Are you taking all expenses into account for your CoC calculation such as vacancy, maintenance, property tax, insurance etc.?

Yes, those are all calculated into the CoC and are linked at the bottom of my post

5. What are the comps (sale price) & rental in the area?

Rentals seems to be set at around 1850/1900 in the area. Adjacent condos and other buildings/neighborhoods are 2000-2200.

Also CoC is a static & point-in-time metric. It basically helps you to gain confidence that in the near short-term assuming you hit your rental price assumption, you will not lose money. The more important metric over a 10+ year period is IRR.

By itself, for a SFR (or TH), your CoC is in line with the market perhaps even on the higher side if you hit 7.5% CoC. Remember, generally speaking, high CoC = higher risk (B- or C class neighborhoods) - that's why I emphasized to look at CoC side by side with IRR.

I will have to do more research on the IRR. This is the first I have heard of it.

 

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