Your Cash-on-Cash Target?

Question

Calling all single family investors!

I am curious to find out what your cash-on-cash criteria is? 8%, 10%, 12%, 15% 25%?!

I am an agent in Northwest Indiana and am seeing homes selling for $30,000 - $45,000 in decent shape and neighborhoods in Michigan City and surrounding areas.  Most of which are roughly getting at a minimum of 10% COC return all the way up to 20% after expenses, vacancy, and management.

What do you shoot for COC returns...or are there any other important criteria you look for in that number?

Thanks

Garrett Diegel · Answer

@Ian PriceI guess it depends on the market and the deal but in short I think it is sound advice to have some kind of buying minimum criteria. Currently we are at 10%-15% cash on cash with minimum of $100 per door cash flow. More is better but we don't even look for anything less.

Scott Steffek · Answer

Ian,

I offer investors nationwide properties in Northwest Indiana, so I know the market well. Andrew is correct about trying to finance a Michigan City property. I have a mortgage that will do it, but it's hard to find others!  My investors tell me they want at least 10%. But the reality seems to be that they want more than that. I would say 12% is a good target. I buy in Michigan City, but I have to be careful where. Some of the areas aren't the best. I hope I answered your question.

Lesley Resnick · Answer

I never use COC on my own potteries.  I have investors who like it.  The number is to easily manipulated and is not meaningful.  It sort of represents cash flow, but not really.  The second year is a more difficult calculation since your principal has been reduced, lowering cash in.  If you paid no money down, technically the COC is infinite.  If you paid all cash your COC is not very strong.

Google definition:

In investing, the cash-on-cash return is the ratio of annual before-tax cash flow to the total amount of cash invested, expressed as a percentage. It is often used to evaluate the cash flow from income-producing assets.

i.e

100k @ 1k a month home $0 money down - (0 /12k) can not calculate a number

100k @ 1% a month 50k down = (50k /12k) = 24% a year

100k @ 1% a month 100k down = (100k/12k) =12%

Here is the rub....

If I offered you 2 deals and you knew nothing else which of the three would you take? The middle one, however, looking at other data, it may not be the best.  The first one has no cash investment and the third one has a better cash flow, since there is no mortgage.

I like to look at several things to to assess a deal.  One data point can lead you astray

1.  Rent multiplier - one of the few metric that allow you to compare dissimilar properties

2  Cap rate - net income compared to the property value

3.  Actual dollars left a the end of the month.  If it is a large number and the ratios are bad, I would still take a good look.

4.  Financing - how much do I need to put in the deal and the terms.

Justin B. · Answer

As most everyone will say, it depends.  How much cash are you putting into it?  The ultimate goal is "infinite" but if you are looking for a flat general idea, I'm around 20%.  But let me be clear, there are lots of things that influence it. 20% can be good or bad depending on a number of factors, just trying to answer your question "generally".

Perry Farella · Answer

Another thought here is to use an Investors Rehab loan called HomeStyle.  That way all the debt is on the new investment house on not your own cash ( ask yourself what Trump would do LOL).  HomeStyle  works on single family investment properties or condos or townhouses but  not on multi-units. It is a conventional loan insured by Fannie Mae.  You need a 20% down payment on the total of the purchase price plus  rehab funds needed. It is on a 30 year term so cost is about $5 a month per each thousand dollars borrowed. You do have to hire a general contractor to do the  work, no "self help". This is a managed process to keep you from getting  into trouble basically. It works for 2 important reasons; 1) the future  rent is projected that the house will generate and you get 75% of that  as extra income to qualify for the mortgage; 2) the future, finished  value of the house after all rehab is done, is used as Appraised value  to allow you to borrow the funds. Example: old house  costs 50k to buy and 50k more to rehab, down payment is 20% of that or  20,000; future value with that 50k rehab is appraised to be 120k. You  win. You can flip the house, the lender cant stop you or make you rent  it. But rental is assumed so you get the credit or extra income based on  Appraiser survey of local rents for similar homes to get the mortgage  approved.  All without adding debt on your own house or using your own cash for the whole deal. I wrote a blog on this called  Rehab Dollars & Sense at perryfarella.com. Look for the HomeStyle stories there.

Scott Steffek · Answer

Garrett,

I'm not sure I understand your question. But I'll try to answer it. If an investor buys a property and they're financing the deal, we'll ask them how much their payments are per month.  We then add that number into the CCR calculations, so that the investor knows his "true" CCR % and will also know his "actual" cash flow per month.

If you're talking about you loaning me money to purchase a property, that's a totally different animal.

I'll PM you.

Garrett Diegel · Answer

@Scott Steffek - I have a question you might be able to answer. How to you structure a deal for investors with the cash on cash return. For example - investor puts in $50,000 for the down and rehab costs, the rest is financed through traditional mortgage for 30 years. Cash flow is say $500 or about 10% cash on cash return. How do you pay your investor back their money? Would it be interest only loan and pay them with the cash flow? Working on a deal like this and trying to get my head around it :-)

Your Cash-on-Cash Target?

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