Real Estate Investor · Monroe Township, NJ · Member since 2016 · 468 posts · 85 votes
Folks - I am running some numbers on listings and have the following question regarding cash flow versus cash on cash. Brandon advises a rule of thumb of $150/unit. I have also seen him advocate something greater than 10% on COC. When I run my numbers I am finding the following scenarios. How do I go about determining a good investment from bad based on these? Per unit cash flow seems good but COC seems low. If I need to use both of these metrics, I feel I will have no houses to pick in the market where I am (NJ) and I need to close down my real estate endeavors. Kindly advise. I am getting incredibly frustrated running numbers and I still have hundreds to go.
Rules of thumb are stupid because they are market sensitive and what makes sense where Brandon lives might make no sense where you live on the complete other side of the country. What is a good return in your area? What is a good return in WA state where Brandon lives? I live in Cleveland and those numbers are horrible for our market.
Here's the way I look at it... you can easily get 5-8% return in an index fund in the stock market. It's safe and sound and you can get it back out whenever you want. So if you are investing in real estate and getting less than 5% then you should put your money into something more liquid that will get a better return. Make sense? It's just a numbers game and a business decision at that point.
You need to understand your market and analyze enough property where you want to invest to get an idea of what a good investment is in your market. If you want a certain ROI and you can't get it in your market no matter how hard you try (think 10% return in LA) then you need to pick a new market.
Rules of thumb are stupid because they are market sensitive and what makes sense where Brandon lives might make no sense where you live on the complete other side of the country. What is a good return in your area? What is a good return in WA state where Brandon lives? I live in Cleveland and those numbers are horrible for our market.
Here's the way I look at it... you can easily get 5-8% return in an index fund in the stock market. It's safe and sound and you can get it back out whenever you want. So if you are investing in real estate and getting less than 5% then you should put your money into something more liquid that will get a better return. Make sense? It's just a numbers game and a business decision at that point.
You need to understand your market and analyze enough property where you want to invest to get an idea of what a good investment is in your market. If you want a certain ROI and you can't get it in your market no matter how hard you try (think 10% return in LA) then you need to pick a new market.
My stock investments have yielded a long term return of 7.2% over 10 years. Accounting for risk factor getting anything less than 15% on RE investment does not make sense to me. I live in NJ, so the option of investing out of state is not viable at this time as a starter. What are my options?
Sorry but isn't this completely different from all the analysis and podcasts which recommend a $150 to $200 cash flow per unit and an above market COC return? If none of these are needed then wouldn't it be OK to buy a property where cash flow is zero and just waiting for someone else to pay off the loan over 30 years?
Paying off a mortgage reduces the cash flow on a rental due to the fact that the equity expense (opportunity money value) on the rental income should be a minimum 10% off the top. Where as the cost of borrowed money is usually less than 5%.
Cost of $100,000 mortgage at 5% = $533/month ($124 principal)
Cost of $100,000 equity at 10% (opportunity) = $833/month
$100,000 in equity costs you $300 more per month off of the rental income of the property than the same amount of mortgage. Cash has a high value where as leverage is cheep and you get exactly the same appreciation on the property regardless.
Try buying groceries with equity, my store said no thanks.
Greg - so help me understand. So are we saying as long as I am cash flow positive on the rental I should not care that much if my COC is 1%, 5%, 10% or 15%? Obviously I would pick the one with the highest cash flow and COC if I have a choice but in NJ for buy and hold in areas I prefer to look into I am finding cash flow to be positive bur COC around 1 to 2%. Is this OK to consider given your explanation?
@Abdul Azeez COC is just a piece of the analysis you should use when looking at property. It's not always a very clear cut decision.
You may not be able to pick the highest COC % due to amount of money needed for a down payment, or perhaps the property is not in a great area, or may have a ton of deferred maintenance.
First, how did you arrive at the COC % - does it include all your expenses, including maintenance, CAPEX, and Vacancy?
Are you considering a 15 or 30 year mortgage, or something else? If your COC calculation is based on a 15 year loan, then you will have a paid for property in 15 or 30 years without putting in anything except your initial investment (if you ran your #s right and buy at the right price).
Over that 15 or 30 years there should be some amount of appreciation - though I don't ever count on appreciation in my analysis because it's all just speculation.
Feel free to give me an email or call- I'd be happy to help you look at the numbers.
I consider COC one of my biggest factors, but cashflow definitely matters too. Like @Matt Motil said, you can use that to compare against other investment opportunities. But like @James Wise said, you also get your equity. I largely ignore the equity aspect while analyzing a property though.
@Abdul Azeez COC is just a piece of the analysis you should use when looking at property. It's not always a very clear cut decision.
You may not be able to pick the highest COC % due to amount of money needed for a down payment, or perhaps the property is not in a great area, or may have a ton of deferred maintenance.
First, how did you arrive at the COC % - does it include all your expenses, including maintenance, CAPEX, and Vacancy?
Are you considering a 15 or 30 year mortgage, or something else? If your COC calculation is based on a 15 year loan, then you will have a paid for property in 15 or 30 years without putting in anything except your initial investment (if you ran your #s right and buy at the right price).
Over that 15 or 30 years there should be some amount of appreciation - though I don't ever count on appreciation in my analysis because it's all just speculation.
Feel free to give me an email or call- I'd be happy to help you look at the numbers.
Justin - COC analysis included 10% for routine maintenance, 10% CAPEX, 10% vacancy and 10% property management. I considered a 30 year mortgage. I did not consider appreciation.
New member here and not to sidetrack from the discussion here but when I see the discussions on "10% for maintenance, 10% CAPEX, 10% vacancy" etc. Is this meaning 10% of the overall rental price or is it talking 10% of the remainder of money after account for the mortgage and insurance? I am trying to figure out this formula I keep seeing people use. What all needs to be accounts for besides the items you listed (I would manage the property myself), and how are the percentages determined? Just rule of thumb?
Also, if you have a link to a good explanation of COC I would appreciate it!