Starting cap rate/ cash on cash ROI

4 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!

@Pooshan Kapil

Cap rate isn't a measure of return, but rather one of risk. Additionally it isn't used in the residential space, so looking at it is kinda useless. 

Furthermore, looking at CoC return is just the beginning, you have to look at how your returns will perform over time. Buying RE isn't like buying a bond and holding it until maturity, where you'll get an effective yield and go on your merry way. Things will change with the investment. Rents will grow at a certain rate as will expenses. You'll pay down the mortgage and the value of home will go up or down. All of these facts are missed by CoC return.

Short answer is "it depends". MKE has lots of different micro markets through the metro area. In nicer areas you'll be lucky to get a 1% rent to price ratio. In not so nicer areas you can easily find 1.5-2%. The rule of thumb I used when I started investing in the MKE area was $500 of cash-flow for a $150,000 property. So if you put 25% down on that $150,000 property or $37500 that's a 16% Cash on Cash (CoC) Return. Hope that helps.

Don't take seriously cap rates given to you by sellers. Sellers can manipulate cap rates easily by doing things like deferring maintenance in the last year or simple "forgetting" that they are calculating NOI using their current property tax rates- not the rates you will be paying as the new owner.

Stick with numbers they can't ******** without committing fraud like gross rents from rent rolls and bank statements, and listing price. 

From there you can do your math, and Brandon Turner will tell you 12% CoC. That's Brandon Turner- he'll have to show you where you can find it.