Properties with min: 12% cash-on-cash return (at 80/20 leverage)

16 Replies

Searching for markets with properties that meet or exceed the following criteria:

- cash-on-cash return of at least 12%

- annual appreciation of at least inflation plus 2%-3%

- low crime area

- strong school system area

Above targets to be reached after provision for the budget assumptions below:

- 10% vacancy

- 10% of rent for property management fee

- 10% of rent for CAPEX

- 5%-10% of rent for general Operating Expenses

- 1%-3% of property value for insurance

- 1%-3% of property value for taxes

- 10% of rent for misc. expense retainer

- debt service on 80% leverage

Are my expectations unreasonable, or have you experienced/come across properties in locations where I could achieve these targets?

Look forward to the feedback! Please feel free to share agents/property managers/other “Core Four”-like team member’s info as you deem helpful.

Thank you!

You already posted this scenario.. while it can happen you will have to hunt for it.

like all things real estate returns price for risk.. rare is there high cash flow AND appreciation.. and tiny appreciation like 

3% a year might look good but its not real.. you buy a rental that will make 12% under your scenario you need to find a 50k house that rents for 900 type thing .. which you can find.. so 3% appreciation it goes up a whopping 1,500 a year.. but in reality it stays at the same value.. since the next investor wants to make the same money you are.. only way values increase substantially is rents go way up.. and in cash flow markets rents ( which is a good thing) are generally very stable with not a lot of movement up or DOWN.

But for your exercise check out small little towns in PA  and outside of Pittsburg and up towards Erie.. you will get the cash flow i bet.. appreciation only on paper not in reality.

Originally posted by @Jacob Ashley :

@Jay Hinrichs

Thanks, Jay.

I know I already mentioned this, but it was in a comment of a post. I wanted to try to clarify my criteria and also hear other feedback through an altogether new forum.

Appreciate your input.

Gothca lets see what others have to say.. that's my view point.. so you got one opinion  :)


@Jacob Ashley If you are using a Property Manager, and you have already factored in taxes, insurance, capex, and misc...then what other “operating expenses” are you planning to have at 5%-10%? Of course, things happen...

From a cash flow perspective, I don’t see your numbers as unreasonable at all, because they are pretty conservative as long as you buy right.

It’s the 2%-3% annual appreciation, along with that kind of cash flow, that may be hard to find.

@Jacob Ashley - In general this is unrealistic to expect all of those at the same time. Are there exceptions to this? Of course. You may be able to accomplish this for a couple or few years in the right market/neighborhoods at the right time which even that is a hard feat. But if you're looking to target markets that consistently over a 20-30 year period average 2-3% appreciation after inflation, well that's like a total of 4-5% annual appreciation which puts you in markets like Los Angeles, New York, Portland, Seattle, Denver, etc. 

Finding a legit cash on cash return of 12%+ would be a really hard feat in any of these markets. I guess it's possible to find that diamond in the rough off market with a very desperate seller but nothing that you can build a real strategy around. 

There's deals out there that will yield those returns but they are VERY rare. A more realistic COC in this market is 8-10%. 12% COC is most likely going to be a C-D area.

if there are areas that meet all those criteria, then everyone will put money in that market and will soon become a place that generates less COC return. Like what @Brock Mogensen said, you're probably looking at 8% COC return in a B- neighborhood, and maybe even less if you throw in good school areas.  However, those areas tends to have better appreciation.  

It's a trade off between risk and reward. you will need to find a market that fits your needs.  Good luck on your search!

@Jacob Ashley if I knew of a city that combined all the best qualities of B, C, D class properties like you're looking for I would have already bought all the houses there, and I wouldn't be telling many folks on Bigger Pockets about it ;). 

I don't have a specific market for you, but my two cents is you might have more success hitting both high cash on cash return & appreciation with a STR rather than a LTR.

Best of luck in your search, but remember: real estate, as in all things, is a game of compromises... and if everything is a priority, nothing is a priority.

Stop hunting for fairy tales and hunt for a deal.

If you make 100 offers and get no deal lower your most unrealistic expectation.

If it doesn’t work out somehow find out why and correct it for round 2.

The only thing I can think of to meet those requirements is to invest in a C area that you think will gentrify. You'll get your cash flow and COC return, and the appreciation is a maybe. A gamble. That's basically what I'm doing with Chattanooga TN.

I'm not sure I disagree with the possibility of a market that creates both cashflow and appreciation but I think it would be hard to find with out a value add strategy. 2-3% annual appreciation over a long period is fairly normal in decent markets. Id challenge anyone to find me a market other than low income c class and below areas where appreciation of 2-3% didn't occur over the last three decades.

A quick Google search tells me the average home price in 1990 was around 120k vs 226k last year which by my math means on average houses rose by 2.1% annually over that 29 year period.

Which to me seems to mean that if you buy a place with 80% leverage and amortize it over 30 years your original 25k investment will now be worth around 215k (this combines the amortization gains and the appreciation gains and assumes a reminder of a few thousand since it hasn't been 30 years) obviously it seems more likely this would be amortized over 20 years or have been refied or sold at least once during this period.

But I digress the second part of the equation was to cash flow 12% cash on cash. There in lies the trick for me. As mentioned I think the appreciation is essentially automatic on average (although I'll admit I don't care about appreciation when analyzing a deal I want a market I don't think will decline and figure amortization and appreciation are the bonuses for long term buy and hold strategies) I think you need to buy assets that have rental upside and need some renovation to get there. It's fairly easy to get 12% cashflow if you are using a value add strategy particularly in b class areas. I guess what I am saying is buy in areas you are comfortable holding for decades and buy for cashflow. Get as good of terms as you can on the notes to increase cash on cash return and buy the properties on those areas that need some love and you have a real shot at a 12% cash on cash return.

This is a long winded way to say buy for cashflow and don't worry about appreciation cause that will just happen as long as you find stable markets and hold long term.

@Jacob Ashley It's really all about the numbers. Following the normal rental model may be difficult to find numbers like that. You would need to rent out a house for 1.27% of the monthly rent to hit your numbers.  For instance, if you found a house at 100k, this is how the numbers would need to look:

Home Price 100000
Down Payment 20000
Rent 1271
Vacancy 10% 127.1
Prop Man 10% 127.1
Gen oper ex 7% 88.97
Taxes 2% 25.42
Insurance 2% 25.42
Misc exp. Ret 10% 127.1
Debt Service (5.25 for 30 years) $549.80
Total Expenses 1070.91
Profit Goal 12% COC Return 200
Actual Profit 200.09

If you were looking at a 150k home here is how the numbers would need to work:

Home Price 150000
Down Payment 30000
Rent 1907
Vacancy 10% 190.7
Prop Man 10% 190.7
Gen oper ex 7% 133.49
Taxes 2% 38.14
Insurance 2% 38.14
Misc exp. Ret 10% 190.7
Debt Service (5.25 for 30 years) $824.70
Total Expenses 1606.57
Profit Goal 12% COC Return 300
Actual Profit 300.43

But honestly, you get get a much better return if you buy a property under market value and force appreciation.  You could also get much better returns by doing a different investing approach such as a lease option or the BRRRLO Model.  Here is an example of the numbers following the BRRRLO Model.

Home ARV and appraised Value 100000
Down Payment 5000
Purchase Price 70000
Rehab and holding 15000
Rent 1271
Vacancy 10% 0
Prop Man 10% 0
Gen oper ex 7% 88.97
Taxes 2% 25.42
Insurance 2% 25.42
Misc exp. Ret 10% 0
Debt Service (5.25 for 30 years) $549.80
Total Expenses 689.61
Profit Goal 12% COC Return 50
Actual Profit 581.39
Actual COC Returns 139.53%

You could even lower the rent to 843 and still get the same amount of returns and get a much higher COC return.

Home ARV and appraised Value 100000
Down Payment 5000
Purchase Price 70000
Rehab and holding 15000
Rent 843
Vacancy 10% 0
Prop Man 10% 0
Gen oper ex 7% 59.01
Taxes 2% 16.86
Insurance 2% 16.86
Misc exp. Ret 10% 0
Debt Service (5.25 for 30 years) $549.80
Total Expenses 642.53
Profit Goal 12% COC Return 50
Actual Profit 200.47
Actual COC Returns 48.11%

@Jacob Ashley you can find that on the back end of a BRRR deal and probably be able to beat those numbers. If your looking to get that on the purchase I think it's a little unreasonable unless your buying in 11 cap areas. This is where you find the worst situations that will have you wishing you stayed with your day job. A lot of people who post awesome numbers post the back end of a BRRR deal. After you renovate and raise rents the deal will look a lot better.

The 12% Coc is possible, but all the other high expense percentages you have are what lowers the coc and overall return. If you lower a few things your numbers will be attainable and more realistic.