Recommended CoCROI for an all-cash purchase?

Question

I have a partner that is willing to fund my deals. He swears that 15 year mortgages are best, and he will never do a 30 year mortgage because of the high interest. I'm wondering what CoCROI I should be looking for in my analyses when considering 15 year mortgages and cash purchases.

Account Closed · Answer

@Alex Todor

What your friend swears is not necessarily what is best for every one. Personally I would take a 100 year loan if a bank offered it. With a shorter term loan, you're going to have a higher mortgage payment, and less cash flow, which means a lower cash on cash return. It's really just gonna come down to what your comfort level is, and how that helps you move closer to whatever your end goal is. For me, in my market, if a 15 year loan was the only option I had, I would still "try" and work the numbers so I realized a 75-100%+ cash on cash return, or something pretty close to that.

Joe Villeneuve · Answer

Agree 150%.  Equity you buy is a cost to you, and must be recovered.  Equity gifted to you is a return on investment.  When you tenant pays the mortgage off for you, they are gifting you the payoff part...and they are the ones paying the interest on the loan...not you.

If you are buying a property that cost 100k, you have two options...all cash buy or 20% down.  Let's do the math:

A  100k all cashCost to REI = 100k# of Properties = 1Total Property Value = 100kCash Flow = 10k/yrYears to recovery of cost = 10Profit during first 10 years = 0B 20% Down (20k)Cost to REI = 20k/property# of Properties = 5Total Property Value = 100k/property; 500k TotalCash Flow = 5k/yr per property; 25k/yr totalYears to recovery of cost = 4Profit during first 10 years = 150k (profit starts in year 5)

It gets better, and better, when you calculate appreciation, and adding properties using the CF.  By that I mean the spread between the returns for the 20% down just get larger and larger as the years pass.

...and my goal is to only pay 10% for the property,...not 20,...and 100% CoCR.