Cash on Cash ROI...reality check

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Cash on Cash ROI...reality check

Samantha Soto
Investor · Indianapolis, IN · Member since 2016 · 221 posts · 134 votes

Hello everyone,

I'm new to this and working on acquiring my first deal along with my husband @Jose Soto. We are looking for properties in the Huntsville, Al area. We have primarily been looking at SFR. We have been using the rental property calculator and have been trying to make offers that get our Cash on Cash ROI to 11%. The hard thing about this is that many of the properties we are looking at are below 100k. For example, one I am looking at is listed at 87k. In order to make the numbers work for 11% I would need to offer 53k. It just seems highly unlikely to me that anyone is going to want to accept such a low offer. I even feel bad asking realtors to make these offers...like they are going to think I am wasting their time (except @Christy Harris, she has been amazing and hasn't laughed at us one...at least not to our faces!)  Anyways, I was curious to hear from the community, specifically people who have SFR's....what is the typical cash on cash returns that you get for your properties?  Do you have any with lower cash on cash ROI's that you are still happy with?  

Any words of wisdom for this newbie who is eager to buy but also wants a good deal?

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Mike Hanneman
Investor · Coeur d'Alene, ID · Member since 2016 · 551 posts · 218 votes
10y

I don't ever feel bad for making a low offer, especially if your numbers back it up. The worst that happens is you don't hear anything back. If a home has been on the market for an extended period sellers could get motiviated to sell and are just waiting for the next offer to come in. 

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  • Wes Brand
    Investor · San Francisco, CA · Member since 2016 · 314 posts · 153 votes
    10y

    Sounds like not a great market for SFH, you might want to look into duplexes and such, or expand your search area. Low CoC returns can be fine if you expect to be able to increase it in a short period of time, either via appreciation or rent appreciation. I would not buy in an area local to me, with low returns, if the area was depressed / not likely to appreciate (in rents or home value)

    1Reply
  • Derek G.
    Investor · Toney, AL · Member since 2015 · 49 posts · 64 votes
    10y

    Huntsville is part of the Tennessee Valley (Lower Tennessee / Upper Alabama). There is a wonderful MLS site (free of cost) most of us in the area utilize as it usually lists properties before Zillow or Trulia.
    Valleymls.com 
    Don't know who runs it, but it has become invaluable to me for property searches. I have sent you a PM on the market in the area. Huntsville and the surrounding area is a good place for the housing market. Scoop em up while the dollars are low :)

    1Reply
  • Mike Hanneman
    Investor · Coeur d'Alene, ID · Member since 2016 · 551 posts · 218 votes
    10y

    I don't ever feel bad for making a low offer, especially if your numbers back it up. The worst that happens is you don't hear anything back. If a home has been on the market for an extended period sellers could get motiviated to sell and are just waiting for the next offer to come in. 

    4Reply
  • Samantha Soto
    OP
    Investor · Indianapolis, IN · Member since 2016 · 221 posts · 134 votes
    10y

    @Mike Hanneman that's the theory I was working with!  It likely won't work on new listings...but I figured anything over 30 days is fair game :)  

    0Reply
  • Andrea P.
    Rental Property Investor · Roma, Italy · Member since 2013 · 63 posts · 19 votes
    10y

    It is a matter of the risk and the effort you could take. 

    Since I live in Italy I could not afford a high risk, A travel to the US could cost me thousand dollars.

    Since the US real estate is not my core business, a lower ROI and having an asset in foreign currency is fine for me. Finally I work few hours per year for the tax return.

    My property manager get 10% of the rent, he is not willing to manage the property rented for lower than $900-$1000. Since he should deal with low income/problematic tenants. He explain me an eviction costs at least $600 + all the opportunity costs (vacancy).

    I try once to arrange a backyard maintenance from Italy and finally I understood that it was better/cheaper to leave the task to the PM.

    As a general rule the higher the rent the lower the issues. Every issue should be an extra-effort for the PM and an extra-cost for you. Finally I agree with the PM in not having low income tenant.

    I payed the property $104K and I rent it for $975. It is not a great deal, but I had 15 days of vacancy in 5 years and the most expensive issue was $600 for the roof.

    2Reply
  • Christy Harris
    Investor · Huntsville, AL · Member since 2014 · 108 posts · 50 votes
    10y

    we try to get a cap rate of at least 8%.  If there are other extenuating factors, such as better schools/more likely to get long term renters, we'll go down to 7%.  

    I haven't laughed one bit...I figure the time it takes to do the paper work is about the same amount of time to go down and show you the house, and I'm forced to analyze another area and become familiar with it.... so it's all good :) 

    3Reply
  • Christy Harris
    Investor · Huntsville, AL · Member since 2014 · 108 posts · 50 votes
    10y

    @Derek G. ValleyMLS is maintained by the local board of realtors populated by the database system we, local realtors, utilize - Paragon.....so yes - ValleyMLS is going to be quicker AND more importantly more accurate!

    1Reply
  • Derek G.
    Investor · Toney, AL · Member since 2015 · 49 posts · 64 votes
    10y

    @Christy Harris, It's just such a great resource you realtors provide. THANKS!
    I see you're a fellow engineer! Then again, the Rocket City has many of us! :)

    0Reply
  • Luis Miramontes
    Investor · Albuquerque, NM · Member since 2016 · 35 posts · 4 votes
    10y

    @Christy Harris hi there! I have a quick question. If an area has better schools, markets,etc. then the CAP rate would be higher and not lower, correct?

    0Reply
  • Christy Harris
    Investor · Huntsville, AL · Member since 2014 · 108 posts · 50 votes
    10y

    @Luis Miramontes - not necessarily - it would cost more to own the house - sales price, property taxes, finishes, etc.  The homes we look at renting in Huntsville are ABOUT  the same rent ($50-100 diff) throughout the city for a similar sized house, just the tenant quality is different.

    2Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y
    Originally posted by @Luis Miramontes:

    @Christy Harris hi there! I have a quick question. If an area has better schools, markets,etc. then the CAP rate would be higher and not lower, correct?

    No. Christy was right to suggest that the better the nearby schools etc, the LOWER the likely cap rate (ie. purchase price goes up more than the corresponding rent return part of the equation).

    [Aah, I see Christy beat me by three minutes in her reply - better put too]!

    [Aha, but I beat Wes by one minute! Admittedly, he also put it better]. Cheers...

    0Reply
  • Wes Brand
    Investor · San Francisco, CA · Member since 2016 · 314 posts · 153 votes
    10y

    @Luis Miramontes While cap rates and SFH don't normally go together, the safer the investment market the lower the rates you'll see. So I'd say the better schools and more desirable market means a lower cap rate. You could get something trading at non-market (market cap could be 5.5% and you buy it at 6% cap) but that means either you're taking on non-typical risk or you got a good deal and can turn around and sell it for market cap and profit on the spread.

    2Reply
  • Luis Miramontes
    Investor · Albuquerque, NM · Member since 2016 · 35 posts · 4 votes
    10y

    hi guys,

    Thank you for replying! @Christy Harris,@Wes Brand, @Brent Coombs

    The reason I'm asking is because from what I know, a cap rate is an indication of rate of return assuming you bought the property cash. So, ideally you'd want to buy at a high CAP rate and sell at a low one. But I also know that if an area is appreciating in home prices you would be able to accept a lower cap rate since you're substituting the appreciation of the house and if an area isn't appreciating at a fast pace then it would make sense to accept a higher cap in substitution of a slower appreciating market.

    0Reply
  • Luis Miramontes
    Investor · Albuquerque, NM · Member since 2016 · 35 posts · 4 votes
    10y

    also, @Wes Brand CAP rates really only apply to commercial properties right?

    0Reply
  • Andrea P.
    Rental Property Investor · Roma, Italy · Member since 2013 · 63 posts · 19 votes
    10y

    The higher the house value the lower the ROI, since the higher income people have more chance to get mortgage. This is why they are not willing to rent (low ROI).

    The lower income people rent because the bank do not lend them money, so they are willing to rent (higher ROI) since they have no other options.

    In my opinion Huntsville is a special case because it is populated by a lot of military (due to the Redstone arsenal). They live just few years there, then they are willing to rent because they stay there for short time (or just they have no long term plan). This should push the rent demand (high ROI). Furthermore they have government steady salaries (low risk).

    3Reply
  • Samantha Soto
    OP
    Investor · Indianapolis, IN · Member since 2016 · 221 posts · 134 votes
    10y

    Thanks everyone!  I appreciate the support and advice!

    0Reply
  • Andrea P.
    Rental Property Investor · Roma, Italy · Member since 2013 · 63 posts · 19 votes
    10y

      @Samantha Soto, please consider me as beginner. In the place where I live (and I was born) we have concrete houses only. Just buying a wood house was pretty strange to me.

    By working hard, you should buy houses below the market value (i.e. foreclosure and/or rehab), in this task the local investors are obviously advantaged. 

    1Reply
  • Assaf U.
    Engineer/ Investor · Tel aviv, tel aviv-yafo · Member since 2014 · 12 posts · 3 votes
    10y

    @Samantha Soto  from my short experience I found that I'm a big fan of the big numbers game, if you will decide that you reach out for 20 houses a week with an ambitious but realistic criteria. I believe the the desired house will arrive.

    having said that, don't grab that high return too hard, if after a period of time you see that you don't get what you expected, don't hesitate and buy the best you find,

    with the progress of moving we get better.

    2Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y
    Originally posted by @Luis Miramontes:

    hi guys,

    Thank you for replying! @Christy Harris,@Wes Brand, @Brent Coombs

    The reason I'm asking is because from what I know, a cap rate is an indication of rate of return assuming you bought the property cash. So, ideally you'd want to buy at a high CAP rate and sell at a low one. But I also know that if an area is appreciating in home prices you would be able to accept a lower cap rate since you're substituting the appreciation of the house and if an area isn't appreciating at a fast pace then it would make sense to accept a higher cap in substitution of a slower appreciating market.

    That was quite a good summary. Did you only realize that higher appreciation = lower cap rate AFTER your previous question regarding good school areas? And yes, cap rates are generally applied for commercial properties rather than residential ones, mainly because commercial buildings are arguably ONLY about their net percentage income against their selling price. 

    But hey, why can't cap rate be useful to SFR investments too? Cheers...

    1Reply
  • Christy Harris
    Investor · Huntsville, AL · Member since 2014 · 108 posts · 50 votes
    10y

    @Derek G. yes - engineers are in short supply here.  But, I will say that my engineering background has been beneficial in the investing side of the house....analytical, problem solving - or maybe that's my husband (also an engineer)... :)

    0Reply
  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    10y

    Hey Samantha! I'm not far from you...just down in Venice.

    Any reason for Huntsville specifically? The reality is some (most) markets just don't work for numbers. If you have to offer that low to make it work, it probably means Huntsville just doesn't typically have favorable price-to-rent ratios for rental property owners. Unless you are looking in the nicer areas that wouldn't cash flow anyway.

    There are other markets out there that cash flow a ton. It's all about the price-to-rent ratio.

    1Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Ali Boone:

      It's all about the price-to-rent ratio.

      How is that?  What do you tell your clients about price to rent ratio?  What does that metric measure?

    0Reply
  • Tim White
    Rental Property Investor · Madison, AL · Member since 2015 · 177 posts · 110 votes
    10y

    Hi @Samantha Soto,

    I am investor here in Huntsville, and there are properties here that can reach your return goals for a rental.  It may take a little due diligence to find, however they are available.  PM me if you need any suggestions.

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y

    @Ali Boone, if I was one of your clients, I would certainly want to know the price-to-rent ratio!

    (Unlike some others)... Cheers!

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y

    OK, then can either of you explain why?  

    0Reply
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