What is the CoC % I should be shooting for when analyzing?

Question

Trying to analyze lots of properties to know when I see a good deal. Lots of the properties I have looked at seem to have good cash flow but the CoC seems low. What CoC should I shoot for and is cash flow or CoC more important or are they equally the same? Looking for advice...thanks :)

Dustin Lang · Answer

I personally am looking for something above 10%. Stock market (index funds) return an average 7.5% adjusted for inflation so I believe if you're doing REI, at least shoot for something higher than the market.

I really like what Brandon and David Greene talk about on the podcast which is that cash flow is defense and appreciation is offense. By "defense", it means your cash flow ensures that you get to keep the house (paying expenses/mortgage) while making a little extra cash. The real "offense" and money maker is the appreciation in the house. People often think cash flow is what helps you get GREAT wealth but it's really the appreciation gained from REI if you buy RIGHT.

For example:

House A: Is in a C+ neighborhood. Cashflows $200 after expenses but doesn't appreciate

House B: Is in an A- neighborhood. Cashflows $30 after expenses but appreciates 15k in one year.

To get that 15k equity appreciation in cashflow from House A (15,000/(200x12) would tale 6.25 years in comparison. Just an idea.

I also like to think in terms of NWROI or net worth return on investment vs just CoC. For example, I might take a lower cash flow if it means more appreciation cause that impacts my net worth greatly vice versa. It all depends on your goals but definitely look at it from all angles!

Michael Tucker · Answer

Disclaimer: Just started this adventure and still discovering what I don't know so feel free to take my response with a grain of salt. I think it depends on what you're trying to achieve. In general, the more money you put into the deal (down payment, rehab costs, etc) the lower your CoC is going to be - unless you do a refinance using the BRRRR method. If you buy a property with cash it's going to have amazing cash flow, but most likely a low CoC which is probably fine for some people. Anything will probably cash flow when you're buying a property outright. I will probably switch over to this form of investing once I get myself established. Right now, I'm trying to get the biggest bang for my buck (high CoC) with as much cash flow left over so I'm mostly looking at trying to put as little down while still generating solid cash flow. My bottom limit is probably 10% CoC and $150 cash flow, but a lot of that depends on the property I'm buying and how much I'm paying to get into it.

Caleb Brown · Answer

@Dallas Easter

For A area- 5%-7%

For B area- 8%-10%

For C area- 10%-15%

That is a starting point for an idea. Ultimately the return is up to you on if it’s acceptable. There are so many variables. Not every deal is a single or a home run. You need a mix of deals, don’t analyze forever. Best of luck!