What is a "good" cash on cash return?

Multi-Family and Apartment Investing
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What is a "good" cash on cash return?

Mark Mosch
Rental Property Investor · Los Angeles, CA · Member since 2014 · 120 posts · 88 votes

Hi All,  I was curious to compare notes with others as to what minimum cash on cash criteria they use to determine if a deal is doable, and what is one they would be really happy with.  It seems to be that if your objective is to buy and hold and reinvest your cashflow into new buildings, the biggest determinant of your success is your cash on cash return.  If you are making 10% on all your properties, then you will accumulate money and future properties twice as fast as someone making only 5% - so naturally you want that % as high as you can.  On the BP podcasts they talk about "$100 per unit cash flow is good" but that's not equally true for a building where you paid $100,000 per unit vs $30,000, for instance.  So i was curious to see what criteria some of you use in evaluating whether to do a deal.  Right now i am trying for 10% cash on cash, as that seems to me to be a reasonable return, but i don't know if that's too low or if i should be happy making that.  Any insights would be appreciated.

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Shane Pearlman
Rental Property Investor · Las Palmas de Gran Canaria · Member since 2014 · 220 posts · 256 votes
12y

@Mark Mosch I've been asking myself that same question for the last month. At the Santa Cruz BP investor meetup last week I ended up in a debate with @Troy Fisher regarding cashflow Vs equity investing. Cashflow being somewhat hard to come by in the SF bay area.

I have been investing in microloans since 2008 through lending club and have a solid track record of net annualized returns between 7.8 - 8.9%. I feel the odds of getting these returns in the future to be fairly certain, although nothing is for sure. If we are simply talking cash-on-cash, considering that real estate has both higher risk and more work involved, I'd need to see a higher return, probably near 10-12%.

With that said, I have the personal blessings of a solid career I truly enjoy, so cashflow alone is not my primary driver. I really care about the net returns of the deal over its lifecycle. My wife and I are trying to build wealth. 

We are just wrapping up selling a property where the CoC was 6.3% and the net annualized return on the actual sale (forced equity from a remodel / reposition + appreciation) was 37% compounded. While cash if key to keep the property safely under control, I seem to find that the larger returns for our portfolio to date come from strategic growth of equity.

Hope that helps!

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  • Mark Mosch
    OP
    Rental Property Investor · Los Angeles, CA · Member since 2014 · 120 posts · 88 votes
    12y

    Oh - and i do get the returns can be lower on newer and better buildings with lower anticipated maintenance issues, so let me qualify by saying my targets would be like C+ to B level properties for the 10%.

    0Reply
  • Account Closed
    Minneapolis, MN · Member since 2014 · 332 posts · 288 votes
    12y

    We buy 150+ unit apartment buildings and our equity/investors are typically looking for a minimum of 8% cash on cash return in today's market

    1Reply
  • Mark Mosch
    OP
    Rental Property Investor · Los Angeles, CA · Member since 2014 · 120 posts · 88 votes
    12y

    Thanks Sean.  I'm in some bigger syndicates too - and they do seem to be in that 6-8% area.  I'm wondering if the rates are higher on the smaller properties...

    0Reply
  • Nathan J.
    Saugerties, NY · Member since 2014 · 98 posts · 32 votes
    12y

    I am just getting into this game so certainly not an expert. My threshold is $170 per door and a 12% return. I've only come across a few of those deals and was beaten to the punch.  I also assume 9-10% of revenue goes towards maintenance and 6% vacancy rate. I will adjust the maintenance number down if it is a new/refurbished property.  I know that on one of the earlier podcasts (think it was 78) an investor was getting $400 per door which i thought was a fantastic number that i have not been anywhere near.

    5Reply
  • Kobus De Villiers
    Real Estate Investor · Chicago, IL · Member since 2011 · 44 posts · 12 votes
    12y

    Since you can invest your cash anywhere I think a good investment should probably have a 10% cash on cash rate to be considered favorable. Real estate investment has different risks but I do try to identify deals where the rate falls between 8 to 12 percent. Obviously the higher the better but anything below that is probably a deal that I can ignore.

    3Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    12y

    Mark it's all about the deal size and debt you can land on the property.

    That determines LTV and the spread between the cap rate going in.

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    2Reply
  • Shane Pearlman
    Rental Property Investor · Las Palmas de Gran Canaria · Member since 2014 · 220 posts · 256 votes
    12y

    @Mark Mosch I've been asking myself that same question for the last month. At the Santa Cruz BP investor meetup last week I ended up in a debate with @Troy Fisher regarding cashflow Vs equity investing. Cashflow being somewhat hard to come by in the SF bay area.

    I have been investing in microloans since 2008 through lending club and have a solid track record of net annualized returns between 7.8 - 8.9%. I feel the odds of getting these returns in the future to be fairly certain, although nothing is for sure. If we are simply talking cash-on-cash, considering that real estate has both higher risk and more work involved, I'd need to see a higher return, probably near 10-12%.

    With that said, I have the personal blessings of a solid career I truly enjoy, so cashflow alone is not my primary driver. I really care about the net returns of the deal over its lifecycle. My wife and I are trying to build wealth. 

    We are just wrapping up selling a property where the CoC was 6.3% and the net annualized return on the actual sale (forced equity from a remodel / reposition + appreciation) was 37% compounded. While cash if key to keep the property safely under control, I seem to find that the larger returns for our portfolio to date come from strategic growth of equity.

    Hope that helps!

    9Reply
  • Troy Fisher
    Specialist · Kirkland, WA · Member since 2013 · 1k+ posts · 817 votes
    12y
    Originally posted by @Shane Pearlman:

    @Mark Mosch I've been asking myself that same question for the last month. At the Santa Cruz BP investor meetup last week I ended up in a debate with @Troy Fisher regarding cashflow Vs equity investing. Cashflow being somewhat hard to come by in the SF bay area.

    You're not the only one! @Account Closed and I have gone back and forth on this too.  But we all have our own goals and destinations to get too.  I don't have a job that I love.  I have a job that I'm good at but, I work 60-70/wk!  And I don't have a high bank roll, or access to a breadth of private lenders (my track record isn't there yet).  

    So I'm shooting for big cash flow, and high Cash on Cash returns. I want 25-50% COC because I want to grow quickly. It is also probably limiting that track record. Because it's harder to find those types of returns. I love to get into those debates and sometimes get a little belligerent with my point of view. But I also know we all have different End Games, and you've got to plan and dream to your own.

    6Reply
  • Account Closed
    Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    12y

    Mark,

    The findings in this article may surprise you. Look at the ROI on the expensive markets compared to the cash-flow markets. Apparently, it's not what it seems.

    http://finance.yahoo.com/news/best-cities-mom-pop-...

    After reading the article, would you prefer to invest in appreciating markets yielding 0% CCR, or stable markets yielding 10%-12% CCR? As you can see, there is no right or wrong answer. Cash-flow gets you off the rat race while appreciation builds your wealth.

    7Reply
  • Jesse B.
    Real Estate Investor · Cheyenne, WY · Member since 2014 · 71 posts · 37 votes
    12y

    I tie my expectations to a solid REIT such as O which is currently yielding just under 5%, about as safe as you can get. Therefore under no circumstances would I accept a 5% coc on a property. I currently target above an 7.5% coc for a good property in a solid market. For weaker markets or lower class homes I will expect 10% to 12% depending on the property and market (all cash purchase.). But I am constantly reevaluating based on what REITs are yielding. I don't consider appreciation at all but do factor it into determining an acceptable coc return.

    3Reply
  • Wesley N.
    Developer · Hammond, IN · Member since 2014 · 34 posts · 7 votes
    12y
    Jesse Blair I was going to say the same thing. Since money has choice and needs velocity to grow, the deal would have to beat a REIT like O by a lot, because O has virtually zero risk (compared to what we do), there is zero work for you to do and has a track record of returns that you can liquidate from any day instantly.
    0Reply
  • Giovanni Isaksen
    Investor · Bellingham, WA · Member since 2010 · 308 posts · 230 votes
    12y

    When you're looking at cash on cash returns, make sure you're actually looking at net after everything cash flow. That includes fully reserving for future capital expenses based on what those expenses are realistically going to be. You can bet that the REITs do but I see a lot of supposed cash on cash returns that are more of a bragging number than actual results.

    Good hunting-

    8Reply
  • J. MartinPro Member
    Rental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
    12y
    Originally posted by @Troy Fisher:
    Originally posted by @Shane Pearlman:

    @Mark Mosch I've been asking myself that same question for the last month. At the Santa Cruz BP investor meetup last week I ended up in a debate with @Troy Fisher regarding cashflow Vs equity investing. Cashflow being somewhat hard to come by in the SF bay area.

    You're not the only one! @Account Closed and I have gone back and forth on this too.  But we all have our own goals and destinations to get too.  I don't have a job that I love.  I have a job that I'm good at but, I work 60-70/wk!  And I don't have a high bank roll, or access to a breadth of private lenders (my track record isn't there yet).  

    So I'm shooting for big cash flow, and high Cash on Cash returns. I want 25-50% COC because I want to grow quickly. It is also probably limiting that track record. Because it's harder to find those types of returns. I love to get into those debates and sometimes get a little belligerent with my point of view. But I also know we all have different End Games, and you've got to plan and dream to your own.

    Troy, I am all for 25-50% TRUE cash flow returns, and would be happy to have a property that would regularly truly produce 25-50% COC, and I wouldn't care if it appreciated. I would also like to be rich and beautiful. But I don't really have access to any of these right now. How many 25-50% COC properties are you able to successfully acquire and realize the returns? The 3 properties I've bought in the last 2 years have all had great equity gains after rehab, and good cash flow on the back side. And I've had astronomical equity and cash returns on my cash invested, but mostly in equity and cash-out. Let me know when you get in contract on your 25-50% COC so I can buy in ;)

    4Reply
  • Scott Steffek
    Flipper/Rehabber · Crown Point, IN · Member since 2009 · 482 posts · 216 votes
    10y

    After reading these posts, I guess I should thank the good Lord that I'm getting 18-35% CCR! I get these numbers all day long for my investors in Chicago's suburban markets. The only catch is that appreciation on the properties is not there. It's pretty much rent and hold, rent and hold. However, that should start changing in the upcoming years, as we're selling more and more properties at higher sales prices, which increases the ARV on all the properties in the towns we invest in. I truly feel for you guys only getting 6-10%!

    1Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    10y

    Scott investing has many facets to it.

    I know some people that made 8% cash on cash in commercial but in 1 years time made 6 to 7 figures in equity growth due to cap compression.

    So there are areas with lots of cash flow but little to no appreciation, areas with a little appreciation and cash flow, and lastly areas with almost all appreciation and very little cash flow.

    Timing the market cycles is important for the equity growth component.

    Some investors live off of the cash flow and others making 300,400, 500k a year or more income focus on quality of the area and equity growth over time. They do not need the cash flow so it is of secondary importance versus primary for investment criteria.    

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    2Reply
  • Bryan Hancock
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    10y
    Originally posted by @Giovanni Isaksen:

    When you're looking at cash on cash returns, make sure you're actually looking at net after everything cash flow. That includes fully reserving for future capital expenses based on what those expenses are realistically going to be. You can bet that the REITs do but I see a lot of supposed cash on cash returns that are more of a bragging number than actual results.

    Good hunting-

     ^^This

    With an apartment complex or any project held for many years the timing of the cash flows matters a lot. You need to do a proper analysis that accounts for the time value of money. I don't think a COC return works well for comparison and it flat-out sucks if you're forcing value increases or are investing to try to improve the terminal cash flow.

    2Reply
  • Giovanni Isaksen
    Investor · Bellingham, WA · Member since 2010 · 308 posts · 230 votes
    10y

    @Bryan Hancock While my point a year ago was about making sure that the cash on cash return represented what actually ended up in your pocket (before taxes), and I never proposed only looking at cash on cash return, I'm sure you can relate to a situation where investors are promised a 7% preferred cash flow and that if the property in question doesn't proforma at least the pref itsa no good.

    Happy holidays!

    0Reply
  • Kathy Stewart
    Rental Property Investor · Dallas, TX · Member since 2015 · 243 posts · 70 votes
    10y

    My target is 12% however I may have little of this in year one and I also seek value add, so the expenses for that first year could be meek while exceeding far beyond 12% in year 2 and beyond. If I always required the 12% from year 1, I may miss valuable deals that pay off much more handsomely in future years.

    6Reply
  • Bhekizwe M.
    Bulawayo, Zimbabwe · Member since 2015 · 1k+ posts · 253 votes
    10y

    given its asset allocation of some sort (rei), then opportunity cost would be a consideration.So currently 12% is "good"

    0Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    10y

    Recall what C/C means:- Given you down payment, what rate of return does your NOI give?

    It's just like comparing a money market fund, CD or some stock market index YE return.

    So, if your happy with it - - by definition, it's a great return.  If there's other properties that would return more at the time you make your offer, then maybe you should reconsider.

    1Reply
  • Account Closed
    Investor · Miami, FL · Member since 2014 · 80 posts · 32 votes
    9y

    What matters is what really gets in your pocket at the end of the year after All expenses; calculating anything else is just a waste of time.  When calculating your actual return, you should always compute the gain/loss generated by appreciation/depreciation after capital gains and selling expenses + your net rental income (including principal payments) minus income taxes. And don't forget inflation. That's your real net position and actual wealth generated.

    The more you are leveraged the higher the return; actually as you build equity by paying your mortgage every year your return consequently erodes. If you know what you are doing, you are better off getting an interest only loan; however i think very high leverage and interest only loans should only be considered for very stable and safe investments such as appartment buildings in class A cities & neighborhoods, where cap rates are usually low and acquisition costs high.

    I think the term cash on cash is very misleading; the definition says it is the cash generated by the amount of cash initially invested. While it isn't necessarily a bad way of calculating your actual return, the return on equity is a better instrument, because it takes into account the equity trapped in your investment and compare it with your gains or loss. If your property appreciates, you build up equity, your leverage decreases and consequently, your return on equity too; when some properties have greatly appreciated it may be time to do a cash out refinance or use that equity as collateral to serve as downpayment for another investment

    1Reply
  • Ericilda Witherspoon
    Flipper/Rehabber · Fort Lauderdale, FL · Member since 2017 · 10 posts · 3 votes
    8y

    I see the percentage ranges from 5% to 25% my question is....is this based on the 50% rule? I'm a newbie and Im wondering why the numbers are so different. Im thinking that not everyone uses this rule. Thanks in advance.

    0Reply
  • Ericilda Witherspoon
    Flipper/Rehabber · Fort Lauderdale, FL · Member since 2017 · 10 posts · 3 votes
    8y
    2Reply
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