Cash On Cash ROI VS CAP ROI

[Matthew Rogers]

Hey Everyone,

I'm currently looking for my 1st 4 Plex to purchase and am planning to use an FHA loan. On the deals i've been looking at and since my down-payment will only be 3.5% my COC ROI will be fantastic but my CAP ROI isn't great.

How important is it to have a strong CAP ROI vs the COC ROI? What kind CAP ROI's have you guys been seeing on 4 plexes in the current market?

Thanks!

[Andrew Johnson]

@Matthew Rogers It's nearly impossible to talk about "what CAP ROI's have you guy been seeing on 4 plexes". Do you want to be in San Francisco or "warzone adjacent" in Memphis? Neither of those options are "wrong" but cash-flow expectations are very different.

If you're worried, I'd suggested running your numbers using a "standard" 25% down analysis and rework your debt service based on that. Everything is going to look great when you're talking about CoC on 3.5% down. The downside is your cash-flow gets hurt and a random (early) cap-ex expense might kill months (or not a year) worth of cash-flow. Regardless, my feedback would be that if the property doesn't seem attractive at 25% down then I'd question if it's a great property to buy.

And, for what it's worth, 4 plexes aren't valued using cap-rates. With commercial properties you can "force appreciation" through raising rents which increases your NOI which (should) increase your cap rate in the market value hasn't changed. The same isn't true with 4 plexes, at least when it comes to an appraisal, qualifying for the loan, etc. They're going to stick with comps as a valuation method. Ideally you'd want a property below market value (or at least fair market value) based on comps and that has a solid/great ROI.

The "x" factor in all of this is that you have to live in the darn place. There's plenty of reason to pay a premium, look passed ROI, etc. if it means you'll be okay (it's even more fun if you have to factor in a spouse, kids, etc.) living there.

Sorry this isn't really more a direct answer to your question!