Expected Cash On Cash Return - Buy And Hold

62 Replies

Hey guys, quick question for a buy and hold.

If you had $100,000 cash, after buying properties, how much would you expect to produce with that per year? For example,  25% cash on cash return? 

I'd imagine that the more you know, the better cash on cash return you could get.

Is there a difference in cash on cash return if you start out with $10,000 vs $100,000?

I'm really just looking at what to expect from real estate and any ideas, advice you can give on buy and holds.

Thanks for your help on this!

@Chris S.  The difference in returns has more to do with the market options you have than the amount of cash you put into the deals.  As far as return percentage, that too depends on the market you are investing in.

My preference is over 100%...which means I'm getting all of my money back plus profit.  I can do this because of the Entrance/Exit Strategy I use.  If I invest using a more traditional EES, like when I have partners, I look for at least a 25% CC return for them.  If I can't provide that, why would they come in as my partner?

Joe Villeneuve
REcapSystem
A2REIC

Yeah the best is when your calculator has the infinite symbol.  +15% can get you to financial freedom fairly quick if you a have a couple hundred thousand to play with.


Frank

I do not buy for appreciation. My goal is at least 20% COC in cashflow, and a total of 40% including mortgage principal pay down. As @Joe Villeneuve  said, 100% is much better.  :)

@Larry T.  So right Larry.  Appreciation is assumed, and equity is fleeting...just ask anyone that owned a house over the past 5 years that banked on their equity.  How did that work out for them?

Cash is King, Cash flow makes Kings.

Joe Villeneuve
REcapSystem
A2REIC

This is a good question.  So for you as a real estate investor, or as a new real estate investor -- your **minimum** benchmark for a return would be -- 15% to 20%? 

I live in a good rental / cash flow market, and I also invest in the stock market.  I expect my *minimum* stock performance to average inflation + 7% / year.   I would expect for the work involved with owning property (and the lack of liquidity, and the higher transaction costs) that the *minimum* return on investment would need to be higher to justify the investment.  

Karen

And in the stock market, I look for a mixture of cash flow (dividends) and stock price appreciation.  

Hey Chris,

if I had 100k in cash, I would probably not buy 1 single property, but spread it out to 3-4 properties.

You should expect a cash-flow of approx. $350/month for every 25k you invest. That represents a return of approx. 12% and assumes that you DO NOT manage the property yourself, but have it professionally managed. If you do it yourself, you can probably get closer to 15-20%. But think about it - is that worth your time?

I know a company who works like this in specific cities where the long-term appreciation of the properties and the economic growth of the area is pretty much guaranteed over the next 12-15 years. If you are interested, let me know and I can hook you up with them. No, I do not work for them and I will not get anything for sending you their way:). I just heard a presentation last week and was very impressed!

Tom

Hey guys, thanks for the info.  I was thinking it would be awesome to do something like buy distressed, fix and instead of flipping for a profit, take a mortgage and hold where the cash on cash return would be closer to ? .  Does that make sense to you?

@Joe Villeneuve   is this similar to the system you're talking about for your 100%+ cash on cash return?  Just guessing at this point.. Thanks!

@Frank R. thanks for the input

@Larry T.   so Larry, just to clarify, if you use a 20% down payment on a mortgage, you're looking for a minimum of 40% cash on cash return? Thanks for the advice..

@Karen M.   thanks Karen

@Thomas Merrifield thanks for the input.  I'm kind of looking to stay around here with properties 2, 3 and 4.  Is the company in PA perhaps?  ha.  With property managers, do you find it's an issue investing in real estate outside your state?

Thanks for the advice everyone!

Fyi, the "?" in the statement above is supposed to be the infinity symbol.. ha.  Thanks!

I was thinking it would be awesome to do something like buy distressed, fix and instead of flipping for a profit, take a mortgage and hold where the cash on cash return would be closer to ? .

Hi Chris,

no, unfortunately not in PA. The company I am talking about works in TN and TX.

Cheers,

Tom

Originally posted by @Larry T.:

I do not buy for appreciation. My goal is at least 20% COC in cashflow, and a total of 40% including mortgage principal pay down. As @Joe Villeneuve  said, 100% is much better.  :)

I am on the same page as Larry.. Appreciation is a bonus for me and I never look at it.. I prefer force appreciation as you have control of increasing the value of your property via NOI or renovations.. For multi family I would settle for 18% on something over 5 units. Single family must be at least 20%..

You have to love those infinite cash flow

I look for a 10% minimum cash on cash return on rental investments.  That's impossible to achieve in many areas, low in some.  I don't do anything creative or tricky.  Locally I would self manage.  Remotely you're stuck with property management, which hurts your returns and introduces a different set of problems.

Fix and flipping, wholesaling, and any other form of buying and selling are, IMHO, not investing.  They're businesses.  They involve not only cash but also a willingness to invest the significant amount of time required to run the business.

@Chris S.  "is this similar to the system you're talking about for your 100%+ cash on cash return? Just guessing at this point.. Thanks!"

Yes.

JV

I think you have a math error here, @Joe Villeneuve  

My preference is over 100%...which means I'm getting all of my money back plus profit. 

A 100% return means getting all your money back, plus that same amount of returns.  If you invest $1000 and get back $1010, which would be "", you're getting a 1% return.  A 100% return would mean you you get back $2000 on a $1000 investment.

I will contribute with a case study. Here is an actual property I am in the process of purchasing.

Purchase Price: $190,900
HOA Dues: $299
Taxes: $1630 annual
Mortgage Rate: 4.625%

Monthly Loan Costs @ 25% down (30 yr fixed): $736.12

Total Monthly Expenses = (1630/12) + 299 + 736.12 = $1170.95

Rental Price: $1650/month

Monthly NOI: $479.05

Cash on Cash Return (479.05 * 12) / (190900 * .25) = 12.0452% annual COC return

I like condo units because they are easy to manage. Most of your maintenance expense is baked into the HOA dues. Maintenance costs for in-unit repairs tend to be minimal (assuming you rent to decent tenants). At least in my area, rents have been increasing rapidly, so there is also the hope of getting additional return over time. In the event that the market tanks, there is also room on the downside. Remember that the tenant is also effectively purchasing the unit for you (paying down your loan), while paying you a 12% return, so the true return is much higher than 12% COC. Even if you made no COC return from the investment, and simply broke even, you would eventually own the unit and have 75% of it paid by your tenants.

Just be careful how you calculate COC return. You can shift the numbers a lot by tweaking maintenance expense, etc. With a single family home, you can probably get +20% returns on paper, but maintenance expense can be a hidden killer, since you're on the hook for it all. This can also happen with condos and special assessments, but that is largely dependent on the cash situation of the building (this association is flush with millions in cash from a settlement with the builder).

@Jon Holdman  10% return means you get 10% of what you put in back.  You put in $100, and a 10% return means you get $10 back, right?  So if I got a 100% return, I would be getting all $100 back.  That means if I put in $100, and got $110 back, I would have a 110% return.

JV

@Joe Villeneuve   This is kind of embarrassing, since you seem to be selling real estate investment courses.

Let's say I put in $100. And then I get my $100 back. How much money did I make? $0. Therefore, 0% return. The amount of money you put into the property is your basis. If you only return your basis, you make no money. By your logic, if I put in $100,000 into a property, and get $90,000 back, I made a 90% return! Except I lost $10,000. How does that make any sense?

@Hal Thompson  You are of curse correct if you spent the $100...as in I gave you $100, and you gave me $90 back...and you kept the other $10.  That's not investing.  If I invested $100, and I got $100 back plus $10, but I still had $100 in value in the investment, then I got my initial investment back plus a profit of $10.  When I say I get that money back, I'm not saying I cash OUT of the investment.  I'm still in it at the full value of the $100 I originally put in.

...and I'm not selling anything.  I'm answering questions based on how we are able to do things in my market...just like all the other answers/posts are basing their replies on their market.  Sorry if I projected anything different.

J V

@Joe Villeneuve return on investment calculations assume you're getting your original investment back in addition to the return.  So, if you invest $100 and get back a total of $110 you're getting a 10% return.  For instance, a bank CD that pays 10% annually would result in you having the money you paid for the CD plus 10% more at the end of a year.  A 110% return means you would invest $100 and get back a total of $210.  Of that $210, $100 is the return of your original investment (aka "return OF capital") and the $110 is your earnings (return ON capital).

If you invest $100 and get back a total of $10, you've suffered a 90% loss.  I have made some investments like that.

@Joe Villeneuve It might be helpful for you to provide an example.

Here is what I think you're talking about.

I buy a house for $5000. I spend $5000 fixing it up. I then go to the bank and get the house appraised for $30,000, and they offer me 2/3 LTV. So now I get $20,000 from the bank. So I get: $20000 - (5000 + 5000) = $10000. I now made a 100% return on my initial investment of $10000, plus I get to keep the house!

This is all well and good, but isn't really the same as a straight up buy and hold real estate transaction. You are generally taking on a lot of rehab and financing risk (no guarantee it will be as cheap to fix or you will get the financing you want at reasonable interest rates).

I think the skepticism has to do with the throwing around of numbers like 100% return, presumably in a short period of time. It's not that it isn't doable, but generally you are talking about a ton of other factors that come into play that aren't present in a standard buy and hold transaction. My worry would be that the unsophisticated think you are offering something for nothing, when this type of transaction is apples and oranges compared to standard buy and hold returns.

@Hal Thompson  Trust me Hal, I understand your skepticism.  If I didn't see this in action every day I would have my doubts too.  So you want an example.  OK.  Here is a deal that just closed this past Friday.  This is not one of a kind either.  We just put in 5 offers today, and received answer on 4 out of the 5 already.  Two accepted, and 2 with counters.  All had the same ratios and are pretty close in actual dollar values.

Now for the example: 1250 sq ft 3/1 SFH

Purchase/Refi
$43,000      Total all in cost, paid with cash

$60,000      Value after rehab (we're splitting the already finished attic bedroom (12 x 28) 
                  into 2 bedrooms)
$45,000 REFI loan based on 75% ARV/LTV (2 months from original purchase)

Cash Flow
$1100         Rent/month
$  445         T/I/Repairs/PM
$  238         REFI on $45k
$  417         Cash Flow/month
$5004         CF/Year

...then we take the $45,000 we got from the REFI (which is all of the cash we originally put in) and reinvest it in the next house...which based on the offers accepted this afternoon looks like a house right around the corner from this one.

...and we'll get about 9% return in cash each year, and we're starting out with $15,000 in equity.

In the end, all we're doing is using/moving these funds from house to house, substituting a refi loan (that is covered by the rents), and never really spending it since when we refinance the last house in the string...we get the cash back that we started with, plus all the rentals delivering cash flow to us.

Since our lender will let us carry up to 10 loans, meaning we used the $45k 10 times (getting it back all 10 times), what are the returns on this as you see it?

JV

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