Over the years I have had several rental properties in my state (CA). After years of low Cap Rates and cash flow in CA, I decided to buy my first single family home in suburb of Cincinnati. I bought in a nice neighborhood because it was close to my grand-kids and I could spend the first six months doing repairs and improvements and be close to my kids. This was the only appropriate house in that area for sale so I did probably over pay for it. Although the area is growing very fast (many new distribution centers, amazon etc.). I now have a great tenant that is handy and can really help out.
So here are my numbers -
Repairs and improvements 22,000
Down Payment and closing costs 34,686 - Interest Rate 4.25%
Total all in cost 182,000 with repairs
Net yearly rent 14,533
Cap rate 14,533 / 182,000 = 7.9%
Cash on Cash 14533 / 34686 = 4.1%
This is really the first time I have done the Cash on Cash calculation - is it correct? I'm thinking about doing another house in the same area but I'm concerned about my true profit. Is my investment really only returning 4.1%, with all the work and hassles I have been through? Or should I also figure in other things like tax write-off, appreciation, etc.
Over the last 15 years my stock investments have returned and average of 10% per year. I want to diversify more money out of the stock market in case of future crash, but should I really sell stock returning 10% (with not tenants to deal with) for another home that returns 4.1%? Please let me know if I am missing anything.
I think you are a victim of a rounding error.
14533/34686 = .418 or 41.8% not 4.18%
But if you put 22K in repairs into it then your total cash invested is 56686 so
14533/56686 = .256 or 25.6%
Is this in Fairfield? West Chester? You said it was near Amazon.
Thanks Dave, I was hoping I made an error. And it does make sense to add the 22k in upgrades/repairs. 25.6% sounds good. This is actually Burlington in northern KY. Every time I check on a home that just went on the market it is already sold or has multiple offers. My daughter is an HR manager for a distribution company in Hebron KY area and she can not fill all the open positions for truck drivers, fork lift operators, warehouse men etc.
Friend of a friend built a million sq ft of warehouse on spec (no tenant lined up) two exits down from the airport/amazon. They leased it all! It has certainly been a boon to that area, helping to stoke a market that is already on fire.
Wow, I wonder about buying land within 20 miles of CVG airport. It still seems so cheap. For myself it would be great to purchase acreage that my son and son in law could hunt on for a few years and then sell or develop for warehouse space.
Good luck with the purchase!
The biggest mistake in your calcs may be 1) single families aren't valued by cap rate but by comps
Cap Rate and return should be calculated after expenses such as vacancy, repairs, management, insurance, taxes and utilities are taken out. You do say "net" rent so maybe you considered this?
Does the 4K difference from 18K gross rent to net include all of this?
The cash on cash is not the only return, you have any appreciation (or depreciation potentially) as well as pay-down that goes to IRR. You may have tax savings as well depending on your situation. Also, if you keep track of your records you should be able to deduct travel and other "management" expenses.
But yes, that amount COC sounds normal for a retail-bought house (broker involved, mls, not exclusively for investment etc.). Sounds like you bought something relatively safe and low maintenance and you should expect a lower return to go with that safety.
And we have been on a pretty extended bull run (even including 08) so 10% is likely above the historical average. I think its actually 7% or something like that.
Good point, just assumed that was his net cash flow.
yes for my net I subtracted HOA, taxes, insurance, maintenance from the gross rent. The home is very solid so I allocated $600 per year for maint. Tenant has been in almost a year but maint has only been about $100. I have a 2 year lease so did not figure vacancy into the equation. Tenant already wants to negotiate the next 2 year lease.
If I am really making 25%, this seems like a great return without even accounting for appreciation and tax advantages/depreciation etc. If 25% is the real return, it seems like I would want to do this many more times.
So one more question. My Cash on Cash calculations come to 25%. When researching this calculation it said not to include loan principal or interest so I have not. But I'm not sure this gives me a usable number number to compare to my stock investments that have been returning about 10% per year for the last 15 years. It makes sense to not include the principal in the calc because that money is really going to me as principal reduction. But my last payment had $457 in interest. This is surely an expense that need to be included, am I correct?
In writing off interest I will re-coup about 25% of the interest from my tax return but seems like the other 75% of interest needs to be accounted for. Any thoughts, ideas would be appreciated.
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