Desired Cash On Cash Return for a Rental Property

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Desired Cash On Cash Return for a Rental Property

Kevin Castaneda
San Antonio, TX · Member since 2015 · 21 posts · 8 votes

What Cash-On-Cash (CoC) return do you like to see on your rental properties, and at what point in your loan term do you calculate your CoC from when deciding a property is worth purchasing?

I'm doing some returns base-lining for SFR rental properties in my local area which happens to be San Antonio, Texas. Lots of BP investors say they're getting +20% Cash-on-Cash (CoC) returns on their rentals but never describe how they get their calculations! For example, maybe they're not including CAPEX or property management costs and are effectively "inflating" their calculations! I for one think you should always include repairs/maintenance, vacancy, management, and CAPEX in your calculations ....While high returns like this sound great outloud, I'm also skeptical since the CoC percentage can be so greatly influenced by refinancing to a small investment basis (eg. BRRRR strategy). While CoC returns can be extremely high with a small investment basis, over time this percentage will shrink closer to your property's Cap Rate.

So, how do you approach CoC to determine if an investment is worth your time? Or you focus on a high Cap Rate since this number is closer to the CoC percentage you'll get once the property is fully paid off?

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Rick Pozos
Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes
9y

IF you are doing rentals of single family or 2 to 4 units, cap rates are not used at all. Buy and hold is not something that you really need to look at as a cash on cash because, yes it will change over time. If you have a big repair you may be negative for the year, what if you have another one next year, BAM two years with a zero or negative return. That does not mean that the deal is not a good one. Things happen. You want to prepare for them by thinking about capex, maintenance, property management, etc. The whole goal is to get to the point where there is no mortgage and you have some big time cash flow. And not on one or two properties, but 10 or 15 or more.

I look at a property that will cash flow about $200. per month. If you are getting an investor loan with 20% down, it should cash flow more like $300 or $400 per month. The cash flow should not be used except for the property. That is your "other" retirement account. If you have to make some small deposits over the years, so be it. Hopefully after 5, 10 or 20 years there will be plenty of equity AND cash flow for retirement.

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  • David TerbeekPro Member
    Property Manager · Cleveland, OH · Member since 2016 · 260 posts · 162 votes
    9y

    Kevin-  Most people are going to brag about the best deal they did and maybe even exaggerate a bit.  Sure 20%+ returns are possible but not necessarily the norm.   You are well advised to consider ALL of the costs that go in, I can't tell you how many times I see ads that "forget" to consider many of those costs.  

    A very important consideration is the area, tenant and associated risk of the asset. A new build with a high income good credit tenant is not the same risk as a 50 year old home with a low credit blue collar tenant. The first may have a lower CoC return but might still be a better investment. Of course, measuring that risk is the delicate task of a great investor.

    Finally, if you are worried about your CoC diminishing over time, you can always refi the property to return the leverage and restore the return. This is very typical in commercial properties (which usually have a balloon feature on the loan) but can be used in SFR as well. Happy investing.

    216-926-2900
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  • Rick Pozos
    Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes
    9y

    IF you are doing rentals of single family or 2 to 4 units, cap rates are not used at all. Buy and hold is not something that you really need to look at as a cash on cash because, yes it will change over time. If you have a big repair you may be negative for the year, what if you have another one next year, BAM two years with a zero or negative return. That does not mean that the deal is not a good one. Things happen. You want to prepare for them by thinking about capex, maintenance, property management, etc. The whole goal is to get to the point where there is no mortgage and you have some big time cash flow. And not on one or two properties, but 10 or 15 or more.

    I look at a property that will cash flow about $200. per month. If you are getting an investor loan with 20% down, it should cash flow more like $300 or $400 per month. The cash flow should not be used except for the property. That is your "other" retirement account. If you have to make some small deposits over the years, so be it. Hopefully after 5, 10 or 20 years there will be plenty of equity AND cash flow for retirement.

    3Reply
  • Stephen FrancoPro Member
    Scranton, PA · Member since 2016 · 201 posts · 44 votes
    9y

    i get 15-25% this way in Northeastern and Central PA

    rent

    -10% maint

    -10% vacancy

    -10% mgmt

    - all landlord hard cost

    __________________

    NOI

    taking $75-125/mo per door in profit, and balance goes to mortgage...

    this should result in 25k to 35k/unit

    0Reply
  • Nathan Seltzer
    San Antonio, TX · Member since 2016 · 48 posts · 36 votes
    9y

    @Stephen Franco I would definitely recommend including CapEx in there as well, which would reduce your returns to a more realistic 5-15%.

    0Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    9y

    Desired ROI vs Actual is parallel and related to Proforma GSI vs Actual.

    With the Actual GSI, you can adjust the rents, but Actual ROI is dependent upon all the details of the purchase deal itself - - buy smart - - buy at the best discount is always best.

    0Reply
  • Kevin Siedlecki
    Investor · Madison, CT · Member since 2014 · 710 posts · 458 votes
    9y

    @Kevin Castaneda. I'm looking for 10-12% in initial analysis, using conservative estimates for income and expenses. 

    It looks like my actual COC ROI for 2016 is going to end up being 6% on my lowest performing property and 26% on my best. That 6% one is the very first property I bought, before I really knew what I was doing, but it has a good tenant, so I'm not in a hurry to give it up. The 26% property didn't have any vacancy or CapEx expenses this year, so, as you point out, that number is not an accurate long-term portrayal of my actual ROI on it.

    2Reply
  • Kevin Castaneda
    OP
    San Antonio, TX · Member since 2015 · 21 posts · 8 votes
    9y

    @Rick Pozos, Why wouldn't you use the Cap Rate? The cap rate helps indicate the overall profitability of the property - even if it is an SFR?

    Trying to clarify: You say you look for a property that cash flows $200 per month - are you talking about $200 cashflow after budgeting for expenses/management/etc. AND once the mortgage is paid off? I recognize that a property will "cashflow" a lot each month - it really just depends if you count budgeted expenses such as annual repairs as "cashflow". I'm considering cashflow as monthly "net cashflow" after subtracting my budgeted percentages for mortgage/maintenance/vacancy/management/CAPEX and other similar expenses. What do you personally shoot for in terms of monthly "net cashflow" if you just acquired a property with around 20% in investment basis?

    0Reply
  • Kevin Castaneda
    OP
    San Antonio, TX · Member since 2015 · 21 posts · 8 votes
    9y

    @Kevin Siedlecki Is the 10-12% you are calculating once you have just purchased the property (ie. around 20% investment basis) or once the property has been fully paid off?

    0Reply
  • Rick Pozos
    Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes
    9y

    Cap rate is noi/price. What if the seller had the property vacant for 2 months or was trying to evict someone for 3 months. The cap rate would be negative. With only 1 unit the numbers would swing wildly from year to year and you would never know if that number was an accurate one. If everything went well and there were no expenses for the year, you could have a 12% cap rate and you were over paying by quite a bit. It is not a consistantly accurate measure for under 5 units.

    Every property is different and every person is different. Everyone uses a different number for vacancy (5%, 10%, 1 month per year), for management(10%, 8%,self management), maintenance(just rehabbed, turnkey, or dont have the money to do a rehab,but rentable). So everyone will tell you different numbers to plug in your formulas. On that same thought, everybody has a different number that they think they should get out of a deal. And these numbers will vary widely with the type of property whether it is in a rough neighborhood or it is a very white collar type neighborhood or somewhere in between. All of this is very subjective.

    What you have to do is put your numbers in and buy when you feel comfortable to buy.

    0Reply
  • Stephen FrancoPro Member
    Scranton, PA · Member since 2016 · 201 posts · 44 votes
    9y

    @Nathan Seltzer actually, even with cap ex, mid to high teens is pretty standard. I haven't seen a single digit rental return in NEPA....almost ever

    1Reply
  • Ryan Betzing
    Rental Property Investor · Round Rock, TX · Member since 2016 · 24 posts · 22 votes
    7y

    This is an old thread but just to chime in - I'm finding it very difficult to achieve cash on cash returns in the mid teens with our property taxes here in Texas. I invest in San Angelo, Texas, and I'm picking up SFR's for 60k that I rent for $1100 a month and I'm still not getting huge returns because I'm paying $2400 a year in property taxes...

    1Reply
  • Matthew Mason
    Rental Property Investor · Glens Falls, NY · Member since 2016 · 30 posts · 16 votes
    7y

    @Ryan Betzing  enjoy the 2400 taxes...... we pay triple that up here in NYS.


    Look at MF to help with multipul streams of income.

    0Reply
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