Wholesaler · Culver City, CA · Member since 2015 · 185 posts · 56 votes
HELP!!
I'm having a hard time understanding what a good cash on cash return would be on an SFR in Los Angeles, CA.
There is an SFR in LA where the seller is interested in cashing out on it. However, when I run the numbers, It would only get a 3.5% cash on cash return.
It's a 3/2, and can rent anywhere between $3000 - 3500/month. I used the rental calculator and based on what I inputted, monthly expenses would be around $1340. Leaving an average Monthly cash flow of $1900+ (without a mortgage). That doesn't sound like a 3.5% cash on cash return.
I'm so confused and these numbers aren't making any sense. Can someone help me make sense of this?
~3% is what I get as well on my own calculator. ROI is based on the $'s you invested:
$625,000 + $10,000 closing or so even 1900/62500 is only 3%
Hey, Alvin. I guess I'm not understanding what that means. Would that be considered good or bad? I just can't wrap my head around 3% CoC Return vs $1900 Monthly cash flow. (this is why it seems that buy and holds would drive me insane)
It is hard to image the concept in California. I have a SFR in Orange County. I bought fo rthe wrong reason: i.e. Appreciation. That was before the bust. I still have it and it has about recovered and the tenant has paid down the mortgage a bit so i can live with it. However CoC or Return on Investment, Cap rate, what ever you call the monthly return is not there.
I recently sold another Orange County rental and moved the money to Charleston, SC in a 1031 exchange. It took 3 SFR to make the exchange. My Orange Co rental rented for $2750/mo.
The three Charleston SFR's total $4900 /mo.
The last purchase was for an 1800 SF end unit town home for $135k and rent of $1450/mo & No HOA.
This gives you an 12% CoC with after a 20% down mortgage.
The OC unit was a 1500SF end unit condo with HOA of $275/mo and a community Assoc of $35/mo
All that said...
I think what you missing is that is you were to get a 20% down mortgage on your property,
Your investment drops to 125k +say 10k closing = 135k Then the 1900/mo yields a 16.9% CoC
Which sounds much better right? Take the rest of the 500k you save and go buy other deals.
Start with total returns, as computed by IRR estimated over the lifetime of the investment (not just year 1) ... also, one metric should never be considered to the exclusion of others ... each metric gives you a hint but does not tell the full story; the full story comes from understanding and analyzing all the metrics together in their totality. For example, CoC may tell you something about your year 1 cash flow, but will tell you nothing about appreciation (forced and/or market), rent growth, CapEx, quality/volatility of cash flow, mortgage pay down, tax benefits, management headaches, or the risk you will be taking on to achieve that CoC ... all of these things mentioned and more are critical points to be considered that CoC alone tells you nothing about.
Also, LA is a dynamic market, not every property or even every strategy is going to work all the time in this market, but there will always be some strategies and some properties that will work, if you know how to spot them and work them.