Cash on cash concept

[Derek Lamonde]

Hi All,

Typically, my primary focus is the Cap rate and appreciation potential because I've been all cash on previous deals. However, more and more I'm leaning toward financing given the current interest rates. This "cash on cash" concept is something that I'm just now trying to understand.

My first question is:

What is an acceptable period to recoup my purchase money out of pocket? For example, if I finance $300k of a $360k purchase and net $15k after ALL expenses (TOE and mortgage). Is a 4 year recoup a great deal? 

How do I calculate the cash on cash analysis? 

What's the formula?

My second question is:

Given the ridiculous 15 year rates (2.75%), does it make sense to net $5k annually and have the property owned outright in 15 years vs. a 30 year mortgage (3.6%) where I'm pocketing $15k annually? The 30 year option nets me $225k by the time my 15 year would be paid off.  However, who knows where market prices will be at that time so possibly little to no appreciation... 

My thought is that by owning outright in 15 years, I've pocketed $75k and wherever the market is I get money on the sale. Additionally, leading up to a sale assuming the same rental income and inflating TOE a bit, I'm netting $27.5k annually. So selling at the 15 year mark for anything over is a better deal. Am I not looking at this correctly? 

If my financial situation is supposed to be part of the equation, I do well in my full-time gig so the monthly income either way is just savings. My long term financial plan is geared toward an early and comfortable retirement. 

[Levi T.]

Originally posted by @Derek Lamonde:

Hi All,

Typically, my primary focus is the Cap rate and appreciation potential because I've been all cash on previous deals. However, more and more I'm leaning toward financing given the current interest rates. This "cash on cash" concept is something that I'm just now trying to understand.

My first question is:

What is an acceptable period to recoup my purchase money out of pocket? For example, if I finance $300k of a $360k purchase and net $15k after ALL expenses (TOE and mortgage). Is a 4 year recoup a great deal? 

How do I calculate the cash on cash analysis? 

What's the formula?

My second question is:

Given the ridiculous 15 year rates (2.75%), does it make sense to net $5k annually and have the property owned outright in 15 years vs. a 30 year mortgage (3.6%) where I'm pocketing $15k annually? The 30 year option nets me $225k by the time my 15 year would be paid off.  However, who knows where market prices will be at that time so possibly little to no appreciation... 

My thought is that by owning outright in 15 years, I've pocketed $75k and wherever the market is I get money on the sale. Additionally, leading up to a sale assuming the same rental income and inflating TOE a bit, I'm netting $27.5k annually. So selling at the 15 year mark for anything over is a better deal. Am I not looking at this correctly? 

If my financial situation is supposed to be part of the equation, I do well in my full-time gig so the monthly income either way is just savings. My long term financial plan is geared toward an early and comfortable retirement. 

What's an acceptable period to recoup your cash investment; some people don't recoup their investment for many-many years, because they are playing the appreciation game. You need to ask yourself, what is your acceptable rate of return for your cash. It all comes down to the type of properties you want and the type of deals you get.

I just posted this in another thread, generally speaking I look for 12% cap, and my COC normally runs in the 40-60%. I have no problem going down to 8% cap and 20% COC if I know the deal is worth the premium, that way if I want to pay an investor interest of 8-10% for the cash needed, I'm still clearing 10% myself, and have zero cash in the game. This only applies to SFH type deals.