For those of you who have a minimum reserves/unit, do you consider that reserves fund as part of your out of pocket expenses to acquire a rental when calculating your COC return?
That's far from a simple question (I've struggled with it myself in the past)...so you need to change your title! :)
Keep in mind that COC return is not a metric that is governed by any official standards body, so there's actually no "right" answer to this question. In general though, you're going to use the metric to compare the return you're getting on your rentals to other things -- either the potential returns you could be getting in other investments or the returns other investors are getting.
When comparing to other investments you might consider, many of those other investments won't require a cash reserve, so by not including the reserves in your COC calculations, you don't have a truly apples-to-apples comparison. So, for that reason, you often want to include it.
Now, if you are applying this metric as a comparison to another investor's investment, I probably wouldn't include it, as most investors either don't have reserves specifically allocated or don't factor them into their COC. So, you'd have to NOT include these in your calculation to get an apples-to-apples comparison.
I don't because I didn't spend it to acquire the property, I just earmarked it. It's still mine.
If you do spend it later to fix something, it becomes an expense and part of that fabled 50%, which will get replenished by your actual monthly cash-flow from the property, not the average.
I agree. It is not really a big deal one way or the other (IMO) but I am curious how other investors consider it.
On one hand, it is this "untouchable" body of money that could be making money otherwise. On the other hand, you could dip into it if you really wanted to - either to enjoy it as extra spending money or use on another deal. No that you would or should....but you could. By doing so, you increase your return, but also your risk. So by that analogy, it seems appropriate to include it in a COC calc.
@mitch, we posted simultaneously. I agree with you too!
I don't, but I have enough properties now that I don't necessarily add to the reserve fund for every new property I buy. Basically I'm pooling the risk.
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