1st rental property showing a 35.75% CoC return.

44 Replies

Applied for a heloc today to start getting into my 1st investment property. The one I am looking at shows a CoC return of 35.75%. Its been on the market for 2 years, not sure why. I'm looking at it in a few days. The realtor says the units just need sprucing up and some exterior painting. All units are currently rented. Anything I should be asking during the walk through? The realtor said the seller hasn't accepted offers previously because they were too low, but calculating his asking price its still 35% return.

If you get it under contract, definitely get an inspection.  If it has been on the market for 2 years at a 35% return, there are probably some hidden problems with the deal.  Know where the landmines are before buying.

I agree with Greg make sure you get an inspection with a reputable inspector, some even will allow you to walk the property with them non intrusively (while some find it annoying because buyers ask lots of questions) and for sure get and estoppel agreement from the seller as well to validate you COC return some renters haven't paid rent in months.

Correct me if I’m wrong but isn’t the coc return based on how much money you are putting in yourself?  I did the calculations of my four plex and got a coc return of more than 100%...it was because I am bringing no cash at all from my own pocket to make the deal.  

So to clarify, the coc return would be different for every investor...if I understand it correctly.  It wouldn’t mean that there is something wrong with the property it may mean it just wasn’t a good investment for someone else.

@Joshua Bailey I’m purchasing a 4-plex in a couple weeks. We just finished getting approved today for the major portion of the loan. I’m using a heloc as well to close on the property. Good luck!!! Brandon Turners book on managing rental properties has been a huge help in preparation.

Originally posted by @Joshua Bailey :

@Robert Vigil it cash flows 845 a month after expenses and putting 250 aside for Capex

  How many units?   What is the cash flow using the 50% rule?  At that price point, I suspect the 50% rule is aggressive.  What did you allocate for maintenance, vacancy, insurance, taxes, PM, misc?

I suspect the 50% rule will provide a lower cash flow.   Remember buy n hold is not passive.  There has to be a return threshold that makes sense, but is individual specific threshold.

Good luck

Originally posted by @Joshua Bailey :

@Dan Heuschele whats your thoughts? Too good to be true, could they be leaving something out? If the units are in fair condition l couldn't see a reason to pass it up.

 My thoughts:

  • Rent ratio is outstanding.  2.5% ratio now days is very rare.  this indicates likely outstanding cash flow.  
    $883 cash flow at 50% rule indicates outstanding.  I believe at this price point the 50% rule is likely too aggressive, but even if reduced by $100/month, the cash flow for amount invested is good.  
    COC of 35% is outstanding considering this is without the effort of a value add.
    the property has minimal appreciation prospects as reflected by current price.   This likely goes to rent values.  This implies in inflation adjusted dollars, the property and rent are likely to decline with time.  
    cap ex of $250/month is too low for 4 units.   I am not overtly concerned because of the cash flow depicted by the 50% rule (you may be low here, but maybe conservative elsewhere).  
    ~$800/month cash flow equates to $200 unit.  Each unit involves effort.  My view is $200/unit is not good, but your investment amount is minimal and everyone has to determine what is minimal cash flow to be worth the effort. 

I think the initial projected cash flow is good for the investment amount.  You need to decide if the profit per unit meets your criteria.  

Good luck

@Joshua Bailey well IF ITS a true 35% net cap, after ALL,, Ins, PM, Taxes, vacancy and maintenance, then something must be wrong. Why on the market needing little to nothing ? Good deals are gone in a day . I am suspect , 

Good Luck 

@Joshua Bailey

Have you seen the property? Do your numbers factor in any rehab costs in case inspection finds something major?

I came across a deal with similar numbers last summer. Seven units almost 4000 gross per month, for $130,000 in Dayton Ohio.  Part of my brain thought, this is too good to be true, something major must be wrong or will be trashy and need 60 grand in rehab cost to make it habitable. 

I was completely wrong. All the exterior had some rough patches, inside all mechanicals have been updated. The owner really takes care of the place and the people. Plus there were value add opportunities I would not have known if I did not investigate and trust my gut that this might be an amazing opportunity. It was. 

We have owned it since January and this one property pays almost as much as my W-2 salary per month!!  so yes, do the numbers and be skeptical. Ask the hard questions like “why has this not sold yet? Is there anything I should know before we do the inspection?” but also, trust your gut and see the opportunity for what it might be: life changing.

@Robert Vigil great point! So far with all of my deals, I’ve gone the conventional lending route so I’m automatically thinking after putting 25% down + closing costs (assuming he doesn’t put more money in before it’s rented since it’s currently fully occupied). If he’s theoretically getting 35% on that property and it’s been in the market for 2 years, I’d assume there’s some land mines that he’s gonna discover or the area isn’t too great. Now if it’s a more expensive property, the barrier to entry increases which could also explain why it’s been on the market for so long but just food for thought.

Sounds like it's in a bad area.  Classic newbie mistake.  There is a SMALL possibility that it's a good deal and people are just scared of the # of days on market, but that seems unlikely.