I'm not sure if this is the right forum (I never can figure out which to post in!), but here goes: Is it possible get great cash on cash returns using conventional (non-FHA, non-owner occupied) loans and your own money as the 20-25% downpayment? As I can see it, the factors affecting the % return are the following: • Purchase price / rental income ratio • Decreasing the loan interest rate • Decreasing maintenance costs • Increasing leverage (potentially the biggest factor as I can see) Is there anything that I am missing here to increase the cash on cash return? So let's look at a simple example: • Purchase price: $200,000 • 25% Downpayment: $50,000 • 2% Closing costs: $4,000 • 4.5% 30 year fixed rate mortgage: P&I = $760 / mo Let's assume gross rental income is $3,000/mo (1.5% might be reasonable in Philly?). Using the following rough approximations: • 50% rule: $1,500/mo • NOI: $3000-$1500-$760 = $740 Yielding a cash on cash return of 16.44% (NOI Annually / Cash down or 740*12/54000). That's not terrible, it's certainly greater than the stock market on average, but it would be great to be over 20%, right? Or is that unrealistic? Are there some creative ways of bumping that number up, while still using traditional financing that I'm missing out on? Or am I relegated to creative financing if I want to sweeten my cash on cash return? Any comments are appreciated!

A lot depends on what you really want out of your investments based on where you are in your life and possibly depending on your financial plans (early retirement, etc). In my mid 40s with a fair amount of $ in the stock market I started to take my stock profits and invest in 3 family properties around Boston. I stick to B neighborhoods. Putting down 20% ($75-80k) and getting low teens for CoC. That's with streight up 30yr fixed and my int rate is a bit higher because I hold the properties in an LLC. That return is solid for me. Plus: 1. It's much safer than the stock market as long as you get educated and do good diligence on your market and properties. 2. On a $300k property the loan amortization is substantial, as is appreciation (even at 2% inflation) 3. I use the passive losses (depreciation) to offset some of my passive income (i'm a passive partial owner of a small business) So, for me low teens CoC is great. The fact that I can do it in my back yard is also important to me. Cheers, Steeve

@Nancy Larcom All sellers carry about is the "net" generally... rolling closing costs in will stress the appraisal some, but such is life. Essentially if I know my closing costs are $5,000... and I know the seller needs $200,000 to accept my bid... I can bid $205,000 with seller to pay $5,000. As long as the appraisal comes in at $205,000 or higher, it's transparent to the seller (they net $200,000). The difference to you is instead of paying 25% of $200,000 ($50,000) plus $5,000 in closing costs $55,000 total... you pay 25% of $205,000 or $51,250 saving yourself $3,750 in cash. On higher priced properties it's not such a big deal... but on properties in the $60 - $80k range where you're closing costs are upwards of 25% or more of your down payment it can swing things.

Roll your closing costs into the loan and you'll bump up that CoC return another 2% or so. Honestly, these are the types of deals I tend to look for. Solid returns and pretty easy to find.

@John Matthews I'm in philly and have some rentals... I am getting 2.2% on a duplex in E. Mt. Airy if you look at purchase price alone, but I had to put some $$ into rehab to get the rents to where they are, bringing my % down to more like 1.5. However one of the units has a long term tenant inherited from the old owner at a below market rent, and I have not raised rents on him much. Also, this was my first rehab and I have no doubt that someone more experienced could have done the same for less. So I think someone else may have been able to get 2% or at least closer, but shoulda woulda coulda is not a good accounting method... And without a way to finance the rehab costs, rehabs change the LTV ratio. My observation has been that more units in a multi-family typically gives a higher %, but then you also have higher costs in lawn care, snow removal, trash removal, etc. I do think 16% is both a reasonable expectation and a reasonable return (depending, as stated above, on your priorities). But if I'm correct that a higher % may often be coupled with some higher costs or expenses, I think looking at ROI's on some specific examples would be the best way to answer this question because this would avoid confounding factors and make sure you're comparing apples to apples.

@John Matthews We just closed on a duplex in SC with a great COC with a conventional 15 year mortgage (3.875%) Sale price: $53KDownpayment: $13,250 (25%)Income: $12,240 ($1020/month (total...both sides))Expenses: Taxes $1020Insurance $480Repairs $1200CapX $1100Vacancy $979Debt Service $3499No PM Cash flow $3928/year (29%) They can be had....but it took me months to find this one and I haven't found any others in the small geographic area just south of Charlotte, NC where we focus.

See this post that I just started: https://www.biggerpockets.com/forums/48/topics/166...

You can, if you limit the use of your own cash input. Once your start talking about using 20-25% of your own funds for a down payment, it makes it harder...if not impossible in some markets.

@Steeve Breton Right. I'd love to factor that stuff in, but this will be my first rental (and first passive income source) so unfortunately I can't deduct too much of my taxes (yet!). Right now CoC matters most to me as well since I'm young, I figure cashflow will essentially increase the compounding affect, and get me to where I want to be faster. I'm glad I moved then! I used to live outside boston (sharon, MA), but moved to Philly for school then work, though I do miss Boston a bit...

@John Matthews In my examples above the CoC is around 12% but the total returns are in the 25% range once you factor in amortization and 1.5 to 2% appreciation. Not that you should count on the latter. That said, I understand where you're coming from. CoC is the only thing that matters when you're trying to replace your income with rental properties. You might consider flipping or wholesaling to generate some income while you build your portfolio. PS. @Nancy Larcom West of Boston properties generally retail at just under 1% Rent-To-Value. I won't buy unless I can improve it to a little over 1% RTV. Not to get into it on this post but RTVs for higher value properties tend to be lower... but then many of your expenses are also a lower % of your rental income.

@Nancy Larcom I'd be really curious to see your numbers, if you're open to sharing. That's exactly what I'm looking for. @Andrew Syrios @Joe Villeneuve For me I'm looking for more than 20% - Indeed, 16% is better than the stock market on average, but in order to justify the additional TIME investment, I'd like more like 20% (as a starting point). Especially since I can't claim most of the additional tax benefits, as this will be my first rental property (ie. passive income source) and due to my situation, my tax bracket is pretty low (soon to be wife is still in school = no income)

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John MatthewsPoster

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San Diego, CA

Buying & Selling Real Estate

Is high cash on cash return with traditional financing possible?

John MatthewsPoster

Investor
San Diego, CA

Posted January 07, 2015 16:05

I'm not sure if this is the right forum (I never can figure out which to post in!), but here goes:

Is it possible get great cash on cash returns using conventional (non-FHA, non-owner occupied) loans and your own money as the 20-25% downpayment?

As I can see it, the factors affecting the % return are the following:

Purchase price / rental income ratio
Decreasing the loan interest rate
Decreasing maintenance costs
Increasing leverage (potentially the biggest factor as I can see)

Is there anything that I am missing here to increase the cash on cash return? So let's look at a simple example:

Purchase price: $200,000
25% Downpayment: $50,000
2% Closing costs: $4,000
4.5% 30 year fixed rate mortgage: P&I = $760 / mo

Let's assume gross rental income is $3,000/mo (1.5% might be reasonable in Philly?). Using the following rough approximations:

50% rule: $1,500/mo
NOI: $3000-$1500-$760 = $740

Yielding a cash on cash return of 16.44% (NOI Annually / Cash down or 740*12/54000). That's not terrible, it's certainly greater than the stock market on average, but it would be great to be over 20%, right? Or is that unrealistic?

Are there some creative ways of bumping that number up, while still using traditional financing that I'm missing out on? Or am I relegated to creative financing if I want to sweeten my cash on cash return? Any comments are appreciated!

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