Is 20% Cash on Cash Possible with minimized risk?

11 Replies

Here is a question that I was asked the other day that got me thinking. I wondered if anyone could be more creative than I was in finding a solution to this challenge as my answer was a dull buy and hold and keep forever with conventional finance . If you had a half a million dollars to invest and the objective was to earn a yearly income or cash flow after all expenses of $100, 000 per year from it ( in other words 20% Cash on Cash return) , how would you do it? Where would you do it? Which strategy would you use? How would you minimize the risk to your capital? Who can be the most creative? 

20% is a difficult number to reach. For your example sake, I would lend out the money to investors who are flipping property, turnkey providers or whomever else I felt comfortable with and get a 12%-18% ROI with the money being secured by the property.

The faster they turn the houses the more I would make.  

Well risk to capital is in the eyes of the beholder.

Someone might love flipping houses and is good at it and they see low risk to capital. Other investors might see it as a massive headache and can't stand it and labels it as ultra risky.

Varying investors will like certain assets for different reasons. 2 investors could have a discussion on they like A,B,C property for 10 different reasons. The difference being the deficiencies pointed out in one property or asset class type is acceptable to one investor and not the other.

I do commercial real estate. I have many calls with investors. After our talks they decide to move forward or want to look at other investments which is fine. It's a simple discovery period of risks versus rewards and how they see things.

I personally like undervalued retail strip centers right now. On the residential side with houses many markets have dried up. 

Just as a caution be careful about lending money to flippers. Talk to others who have done it to get the negatives along with the pluses. You have to know for instance if you are in a judicial versus non-judicial state and foreclosure costs and procedures among many other things. Also for instance if they cannot sell the property or overbuild you need to push them off into a refi with a regular loan lender so they keep as a rental and you get the debt off your books. This is why HML's look at credit scores now as they want the borrower to have an exit plan if things go south.

With that much money, I think I would look at multifamily in Texas. The cap rates there seem much better than just about anywhere else I've seen. And the population always seems to be growing - mostly because of the jobs.  Plus, its a very landlord friendly state.

@Alan Charles  first off 20% cash-on-cash is challenging to get but, that said, it's possible. I recommend doing whatever approach you know well enough to execute flawlessly. 

One way would be to find a large, distressed multifamily property in a growing area (i.e. San Antonio, Cincinnati, Tulsa, Jacksonville, etc.) and do renovations to force appreciation. That can get you to 20% cash on cash. However, I would sell it after stabilization and do that again. Upon exit you should clear an annualized 20% IRR and can use the proceeds to buy a larger property and do the same thing.

Lastly, personally, I wouldn't use the 500k. I would rather save that 500k and raise the amount that's needed to acquire and fix the property. You'll need some of the 500k to put the deal together but it would be a much more scalable way of leveraging your money. 

I would invest in tax sale and or buy baltimore city rentals. 

My typical sub2 deal will be in the 30% range coc and I've done more than one deal over 100% coc. 

Originally posted by @Alan Charles:

Here is a question that I was asked the other day that got me thinking. I wondered if anyone could be more creative than I was in finding a solution to this challenge as my answer was a dull buy and hold and keep forever with conventional finance . If you had a half a million dollars to invest and the objective was to earn a yearly income or cash flow after all expenses of $100, 000 per year from it ( in other words 20% Cash on Cash return) , how would you do it? Where would you do it? Which strategy would you use? How would you minimize the risk to your capital? Who can be the most creative? 

Hi Alan,

20% is quite achievable in many markets across Ohio.

Having your feet on the ground would make it less risky, otherwise genuine relationships with key people would need to be established in the particular area of interest.

There is some amazing value across the Midwest and I believe you can get a very decent return with minimum risk.

This is just my opinion and experience working the markets here.

Thanks and have a great day.

@Alan Charles  Tax Deeds in Georgia pay 20% upon redemption in year 1.  If you're lucky, you might pick up a house or two along the way.  

Flipping does better than 20% annualized, but it's hard work.  

Hard Money isn't a bad idea if you have great people to whom to lend.

I'm mixing these strategies to mitigate risks.

Rick

Great Post Alan,

I would like to spin off another question from your post.

If you had a million dollars to invest and the objective was to earn a yearly income or cash flow after all expenses of $100, 000 per year from it ( in other words 10% Cash on Cash return) and CANNOT borrow anymore money from the bank as you have hit your maximum limit, how would you do it? Where would you do it? How would you allocate it? Which strategy would you use?  




Originally posted by @Alan Charles:

Here is a question that I was asked the other day that got me thinking. I wondered if anyone could be more creative than I was in finding a solution to this challenge as my answer was a dull buy and hold and keep forever with conventional finance . If you had a half a million dollars to invest and the objective was to earn a yearly income or cash flow after all expenses of $100, 000 per year from it ( in other words 20% Cash on Cash return) , how would you do it? Where would you do it? Which strategy would you use? How would you minimize the risk to your capital? Who can be the most creative? 

Thanks for all the replies so far. Good question @James Park. I guess it would be a little easier with a million. There must be plenty of places to invest in multifamily property with a purchase price of $4million and if you put a million down and finance the $3million at 6% with a CAP rate of 10% you would get a cashflow of $220,000 or 22% on your money. I guess that would be possible in Texas, Indiana, Ohio where @Engelo Rumora   mentioned and certainly in Baltimore where @ Ned Carey mentioned. Not knowing these neighborhoods though I would have to ask Ned and Engelo thier opinions to risk and reward and other individuals on the ground in the respective towns. Realtors that like to talk can be a good source of information. Of course this would depend on borrowing $3million at 6% and finding a good deal with a 10% CAP. There may be other strategies. How about self storage? Mobile Home parks or even a commercial strip as@Joel Owens  described. I would be interested to hear any more creative suggestions.

Originally posted by @Alan Charles:

Thanks for all the replies so far. Good question @James Park. I guess it would be a little easier with a million. There must be plenty of places to invest in multifamily property with a purchase price of $4million and if you put a million down and finance the $3million at 6% with a CAP rate of 10% you would get a cashflow of $220,000 or 22% on your money. I guess that would be possible in Texas, Indiana, Ohio where @Engelo Rumora  mentioned and certainly in Baltimore where @ Ned Carey mentioned. Not knowing these neighborhoods though I would have to ask Ned and Engelo thier opinions to risk and reward and other individuals on the ground in the respective towns. Realtors that like to talk can be a good source of information. Of course this would depend on borrowing $3million at 6% and finding a good deal with a 10% CAP. There may be other strategies. How about self storage? Mobile Home parks or even a commercial strip as@Joel Owens  described. I would be interested to hear any more creative suggestions.

Hi Alan,

Thanks for the mention.

Have a great day.

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