I understand how to calculate the cash on cash return for a rental property. My questions centers around if anything differs heading into year 2. How do y'all calculate it long term? Do you do year two the same as year one? Do you do each year separately and then also average it? Any input appreciated.
There is no long term to CoCR. CoCR is your return on your cash in the first year of investing. After year one, there are a number of other "returns" you would use. The CoCR is designed to analyze how much of your cash you will recover in an investment within a year. It has nothing to do with any returns from the start of year two and beyond.
@Rae Dolan - Its called IRR (Internal Rate of Return). IRR takes into account how long you plan to hold the property, when you plan to sell it, and how much you plan to see it for. There are tons of posts on IRR and spreadsheets. If you don't plan to sell then everything is the same. You subtract your income - your expenses each month.
Not really. I focus in on the CoCR since my goal is to buy with the intention of getting all my cash back in that first year. After that it's all just profit.
I don't deal in percentages since they are misleading...other than the CoCR. You don't spend "%", you spend "dollars". My bottom line is how many "friends" follow my Cash when it exits the deal within that first year.
Here's what I would say to that though. I wonder if the reason you're asking that question is because you want to quantify in some way how real estate profits grow over time. Its one of the things that most people tend to leave out when they look at the initial numbers.
When they buy they look at how much the net rental profit will be and thats about it. Some may take into account appreciation. But what I rarely see when looking at the returns is principal paydown.
And what I see even less of is how all of these things will trend up over time.
Rents should trend up. If renting for 1,400 today, then in ten years, maybe you're getting 1650/mo.
Principal paydown - if a 25 yr mortg on 110k, then maybe your paydown is 200/mo but in 10 years its going to be around 300/mo. And appreciation. On 150k house, maybe your appreciation is 6k/yr (4%). But in 10 years, maybe that appreciation is 8,500/yr. etc, etc. Now your taxes and insurance will go up a little too so not all of that newfound growth will be profit. But still. It is going up over time.
I just adjusted a handful of principal paydown amounts on my schedule of real estate and I think it bumped it about 400/mo in principal paydown total. I think on average, principal paydown goes up 10/yr. So if its 100/mo this year, it will be 110/mo next year. Obviously the size and length of the loan will dictats most of that but still.
There's a point where real estate reaches critical mass when you can scale up in number of homes and then let the factor of time catapult you to a much larger profit than you would typically expect.
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