Starting cap rate/ cash on cash ROI

2 Replies

Hello! Brand new Investor here! Looking to invest in a rental property in either Kenosha Racine or Milwaukee counties of Wisconsin. Just wanted to ask my fellow investors on your first 2 to 4 unit rental starting out what is a pretty decent cap rate / cash on cash roi ?!

thank you for all of your feedback and advance!

I don't evaluate based on COC return because it's a fairly flawed measurement. Pick up the book What Every Real Estate Investor Needs to Know About Cash Flow by Frank Gillani (?) it's an eye opener on a lot of measurements that are commonly used and believed to be indicators of a property's performance. You want to use a measurement like Internal Rate of Return to evaluate a rental property. Frank has downloadable spreadsheets that come with his book which is very helpful.

In a nutshell, basing your purchase strictly based on COC is not allowing for the value of money over time. (In a very generalized example it doesn't account for buying power of $1 today versus $1 five years from now.)

I know this isn't the answer you were looking for but I get very concerned when investors purchase based on COC.

Cash on Cash for a 2-4 unit should be 12+%.  But that will vary depending on the location.  As @Corina Eufinger mentioned there are some other great indicators to use like IRR. Definitely check out that book. However, IRR will only work if you plan on factoring in an exit. If you are planning to just hold for the long term then CoC and Cap Rate can be good indicators.