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!
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.
@Joe Villeneuve, You are fortunate to live in area where you can do this, and I hope it lasts for you. I do want to point out another "cost" that really needs to be taken into consideration with your strategy. In most markets, you cannot rent a $60k house for $1100/mo. There is substantial risk that rents in your market might adjust to more typical levels and leave you with insufficient income to pay the debt you are acquiring.
I'm not at all suggesting that you shouldn't be doing it, just pointing out that there are additional risks/cost that need to be accounted for.
@john
@John M. You are 100% correct in both your points. Most markets can't support what my market can, and rents can go down in any market.
The reason why my market won't is simple. The rents are what stayed the same over the years, the price to buy the house is what dropped, so what I have here is the perfect storm. It's the reason why so many investors have been coming to this area to buy holds...their markets don't match up. You see it in the comments made here on this site. Many markets across the states are still in the high cost, high tax, low rent scales and are forced to do the traditional "hope for the best" and buy low/sell high strategy. Obviously that works here...it works everywhere. Here though, we have rents at $1/sf or higher, taxes at about 60 cents on the dollar, and houses that can be bought and rehabbed around $45-55/sf....and, due to the severe economic downturn this area took over the past 10 years, there are considerably more renters than buyers.
Joe Villeneuve
REcapSystem
A2REIC
Hi Chris,
I think my investment mix is probably quite different from yours and many others who have posted... Going forward (post 2009 affect), I think I will be doing well to get 5% Cash on Cash return from rent (expect another 3% appreciation). Return on equity will be even worse. For various reasons, that likely won't apply to you, I am OK with this (very passive, low leverage, prefer local, hope for more than 3% appreciation).
As @Hal Thompson warned, be sure you allocate sufficient reserves when calculating expected returns. For long term buy and hold a conservative estimate is 50% of rents (50% rule) will go to operating costs (excluding financing)... ie if you are short term then you may not have to replace roof etc, but if you are in forever - roofs don't last forever. Above all, know the street by street (house by house) details of where you are buying as these can dramatically affect your success... unexpected longer vacancy with vandalism can severely dent COC returns.
Many on Bigger Pockets are far more skilled than me, but the most frequent commonality I see is that they use their very, very detailed knowledge and judgement of their market and network to buy below market - make $ when they buy the deal regardless of any leverage .
Financing can also be used to juice the return, but IMHO this is a separate risk/reward issue vs the actual deal. I have purchased with 100% HELOC a few times (infinite return for a while :-), cashed out appreciation and reinvested, so e.g. I could measure returns against total cash into real estate and numbers would look considerably better. However, for a fix and holder, who wants to build equity - I prefer return on equity as a measure I track (and roughly estimate for the long term) to compare to alternative investment like stocks/bond).
@Kathryn M. Cash is King...and tangible. Equity is invisible...and can disappear as fast is it was calculated. Banking on Equity as an investment strategy is just a form of Speculating. Over the past number of years, how many investors rationalized their lack of cash flow by saying they were building up equity, only to find that the economy didn't want to play by the same rules?
Sorry, but for my money I'm looking for cash flow now, and forever.
Joe Villeneuve
REcapSystem
A2REIC
@Kathryn M. Cash is King...and tangible. Equity is invisible...and can disappear as fast is it was calculated. Banking on Equity as an investment strategy is just a form of Speculating. Over the past number of years, how many investors rationalized their lack of cash flow by saying they were building up equity, only to find that the economy didn't want to play by the same rules?
Not disagreeing with you at all and certainly not suggesting that banking onappreciation is better than cashflow for the OP.
Just saying that if you are modeling returns over a long period of time... that ROE is useful. Eg. Perhaps in a few years, your initial example $15k will have grown to say $60k (through mortgage paydown???)... if you then measure ROE it will likely be less than your initial CoC return and you might choose to say I would rather take that $60k and sell or cash-out and invest in other houses or stocks or bonds.
@Kathryn M. I know what you are saying, but I'd rather make use of my equity. If I pull it out and reinvest it, it starts to work for me. If I leave it in the house, it dies. The limited increase in Cash Flow due to no mortgage payments, isn't as high as the larger CF I can get from the next deal.
For me, equity is a trophy. Looks good, but has no real value compared to the movement of it when it is converted into cash...over and over again.
I've watched many an investor with low cash flow, but high equity, lose that equity with a falling economy or market change. You can't bank on the future (equity), but you can invest in the present and the future (cash). The movement of money is what wins, and the "speed of money" is what increases your score...your score being the numbers with $$$ in front.
Joe Villeneuve
REcapSystem
A2REIC
@Joe Villeneuve The correct way to see this is that you are getting 0% down loans. Not that you are making 100%+ returns on your money, as you originally stated.
If I pay $40,000 cash for a house, have it valued at $60,000, and get $40,000 back on a refi, how much money have I made? The answer is still $0. I still own the asset, which has rental income potential, but I also have a substantial loan obligation to pay as well (one that potentially exceeds the true value of the house).
The numbers you provided above seem to track closely with this property from your website, so I'll use that as an example of how to value this property:
http://l.b5z.net/i/u/10177513/f/5413_Robinson_prop...
Zillow (notorious for overvaluing rents and property values), says this house is worth $52k and has expected rents of $841/month.
Rent: $841/month
Taxes: $2016/12 = $168
Insurance: $500/year = $41/month
Maintenance: $30,000 over 10 years = $250/month
Total Expenses: $459
Net/Month = $382
Net/Year = $4584
On a purchase price of $41,000, you make $4584, or an 11% cap rate. There is nothing wrong with that, but you are also highly leveraged (100% LTV) in an area that has seen insane amounts of instability. One might ask if there aren't better, more stable places in the world where you can make the same return.
I should note, this is how I would value this property currently. The numbers you provided may be the actual rental numbers, in which case you are doing far better than an 11 cap. However, the whole 100%+ return thing makes no sense. The loan is still an obligation you would have to pay that would reduce the equity value of the property upon sale.
@Joe Villeneuve Interesting Model, Sounds a lot like what the guys in The Section 8 Bible did. Are your properties Section 8?
Too, If you would be generous enough to share, are you financing for 30 years or less?
And lastly, What cities are you buying in? Just curious because I see a fair number of notes come up in Michigan and might see something that fits your model.
Bob
@Bob E. Here are the answers to your questions:
1 - A few properties are Section 8, but that isn't a requirement.
2 - We finance for 30 years, but we try to pay it off in less...like 15. There are a number of reasons that are not so obvious, and they have nothing to do with getting rid of the debt.
3 - We do this in a number of cities. Here are some, but not the only ones where this works: Redford (South); Livonia; Ypsilanti (48197...but 48198 works too); Wayne; Farmington...not Detroit.
Joe Villeneuve
REcapSystem
A2REIC
@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: If you received $110 in addition to return of your initial investment then it would be 110%. If you only received a return of your initial $100 plus $10, then you would have a 10% return.
@Joe Villeneuve I think your plan is great. How many properties do you have right now and do you see a point where you are likely to stop growing and just pay down the debt.
What is your motive for paying off the loans early?
Thanks for sharing, i think people are getting totally wrapped up on the 100/110 thing, if you put 45k in and refinance and get 45k out with a decent free cash flow after debt service and expenses you are doing awesome, You return, on a zero invested basis, is "To Infinity and Beyond". Congratulations on finding a model that works in your market!!
I don't think that anyone has a problem with Joe's investment strategy, per se. But in the context of the O.P's question, he started saying that he likes 100%+ cash on cash returns on his buy and hold properties. While it may be technically true that if you purchase a house for $40k, get it reappraised at $60k, and cash out your original $40k, that any cashflow you make is now an "infinite" cash on cash return. However, how much money will you have to sink into this property over the next 10 years? What kind of interest rate are you getting on these cash out refis? I think we are all just trying to keep the conversation grounded in reality and not set the expecation that 100%+ returns on buy and hold is what you should be looking for, because for the most part that doesn't exist if you're honest about the cash you sink in versus what you get out.
@Joe Villeneuve perhaps in your market appreciation is ephemeral (or non existent), but in the SF/Bay Area it's very real, and certainly more by design than mere speculating. In short, cash flow pays the bills, but appreciation makes you rich.
I suggest you check out this thread on this topic: http://www.biggerpockets.com/forums/99/topics/135352-why-appreciation-matters-in-the-sf-bay-area?highlight_post=982860&page=1
@Amit M. What do you do with you Equity as it appreciates?
Also, I never said we don't have appreciation, I'm just not betting my future on something that I won't be able to access until the future, and taking the very real chance of it not being there when I need it.
Cash is now and forever. Equity is a trophy, until you tap into it either by selling (future), or refinancing (now AND the future). See, I can access the equity now by refinancing, and when I pay it off, I can access it again down the road (in the future) when it will also appreciate. If it doesn't appreciate down the road, I can still access what equity I have since I will have paid it off. If I wait until down the road to access it, I've wasted the opportunity to given to me now. This is just a form of compounding my return, by accessing it multiple times instead of once.
Albert Einstein was a pretty smart gut, and when asked what he thought was the greatest invention of the 20th century he didn't say the car, the airplane, the wheel or fire...he said Compound Interest. He went a step further by saying "those that understand it, live off of those that don't".
Joe Villeneuve
REcapSystem
A2REIC
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!
Have no idea what has been said, just read this question. Answer is no, your cash on cash is the return allocated to your cash investment from the % of the project income. Money you make over the loan amount is profits or a return on leveraged funds. What you look for is the highest use of your funds. If your leverage fund return is negative it comes from the COC return to break even the cost of leveraged funds or loans. If you put 20% of your cash in, then 20% of income proceeds is allocated to your cash investment.
Those who toss loan proceeds to the COC are skewing their return, it will be exaggerated. :)
Now I read a few posts on page 2.
Joe, you're leaving out the beginning equity, where is the cost of the rehab, the LTV of the refi, oversight and management allocations?
In reality, I doubt few small investors do accounting, allocations of project expenses and income and lump it all together which gives you a skewed or overstated COC return.
At the end of it all, the allocations are consolidated to profit off the holding or project, that is returns on investments, not cash on cash. It all goes in your pocket.
When you're talking to investors as to their claims, know that they are probably wrong in the real world. If you have two guys doing things the same way, they might compare horses, but otherwise you can't compare to the norm or correct methods. This becomes important when you're telling an investor or partner what returns you are or will be getting as then you're making a representation. not just bragging rights in a forum. :)
@Bill Gulley Where did I leave any of those things out. Any numbers I give include all costs, all values (current and future), in the form of income, expenses and equity. I've been doing this for almost 30 years now.
Cash in....cash out.
Equity as start + appreciation.
Loans payments come off of cash flow. Loan amounts come off of equity.
Total up all forms of cost.
Total up all forms of returns (cash and/or paper)
Run them side by side in a timeline.
Joe Villeneuve
REcapSystem
A2REIC
Joe, it was a previous post, not the deal you posted so much.
No, it's not that simple, what you're thinking is logical but not accurate simply subtracting loan payments and adding all the overage to your side of the cash you used, at least as a COC analysis, but in the end, as to your profit, it's all good. :)
@Joe Villeneuve yeah I pretty much do the same as you. Forced appreciation due to significant development (adding a unit, expansion, lot split, etc.) and pull the cash out to reinvest. Except my projects take 1-2 year to completion, but I also add at least another zero to your purchase price, and the appreciation gained.
But what I'm talking about is not forced appreciation, but market appreciation. In highly desire and expensive markets like SF it is par for the course. Just look at the graph on the other link. And that trend continues.
Don't get me wrong. I think you're one of the few investing smart by adding value and leveraging smartly. And you're taking/using what your market gives. Just be aware that in other markets general appreciation is a significant factor, and one that can be anticipated over a market cycle.
Joe's explanation of COC return makes sense to me. Sounds like some are confusing COC return with profit.
Welcome to BP, might go to the introduction thread and say hi!
Yes, Joe's thinking is logical and yes, many have misconceptions of COC returns and profits. I didn't even consider that you were suggesting I was confused, even if it came across that way.
If you search COC you'll likely find tons of threads/posts, might pay closer attention to those with a finance-accounting backgrounds in business as to analysis.
While RE investors talk about their returns I pretty much ignore claims as they are usually incorrect, I certainly don't take a seller's historic performance as it's pretty much irrelevant to the next owner. :)
@Chris S. you are in Pennsylvania which I believe is a place with cheap RE. So if you can buy cheap and get relatively high income you will probably have to work harder to achieve that high return. So, the question becomes how hard do you want to work? At some point it isn't about return, it is about earning with labor. It is drama with tenants in crisis; lots of maintenance because of tenant abuse, and a declining asset base.
In my area my I experience low turnover (average 7 years) and great tenants; no drama; a 100 hits on Craigslist; huge rental increases; high appreciation; but 3-4% return (cash on cash assuming paying cash). Managing these tenants is a minor inconvenience.
Don't get me wrong, I long for those high instant returns but it kind of makes me tired thinking about earning them.
Joe's explanation of COC return makes sense to me. Sounds like some are confusing COC return with profit.
Welcome to BP, might go to the introduction thread and say hi!
Yes, Joe's thinking is logical and yes, many have misconceptions of COC returns and profits. I didn't even consider that you were suggesting I was confused, even if it came across that way.
If you search COC you'll likely find tons of threads/posts, might pay closer attention to those with a finance-accounting backgrounds in business as to analysis.
While RE investors talk about their returns I pretty much ignore claims as they are usually incorrect, I certainly don't take a seller's historic performance as it's pretty much irrelevant to the next owner. :)
@BillGulley Thanks for the welcome. No, I didn't think you were confused. :)
Guys
Joe is 100% correct here in terms of a buy and hold rental which is what this thread is about. Return On Investment means exactly how it sounds "How much of your investment will you return each year.
If you invest $100,000 and get back ; "or return" ; 10% of that in cash flow in year 1; You still have your original $100,000 in the property + 10% or $10,000 in your pocket and this have a 10% return on your investment.
This isn't rocket science.
Cash OUT (1st Year) = CCR (%)
Cash IN (1st Year) Cash IN is all the cash put in for the year.
Example #2:
ARV for house $100,000
Pay all cash for house 75,000
Refinance 75% ARV 75,000
Total Cash STILL IN 0
Cash Flow for the 1st year 5,000
Total Cash OUT 80,000
CCR = $80,000 = 107%
75,000