How to determine COC and other useful metrics on rental props

Question

Hi BP Community,

New investor/landlord here from Northern Nevada... I bought a house in 2016 (Reno, NV area). My wife and I have lived in it for 5 years. It's appreciated nicely and we've paid down the loan. We recently did a cash-out refi and used these funds to purchase a new home and turn our 2016 property into a rental (close of escrow is end of July)....

Numbers- bought in 2016 for 200k. Appraised in 3/2021 for 350K, loan paid down to 142K. About 200k in equity.

Cashed out 100k (20% on new place). New loan around 248k...expected rent around 1650$-1700$, new mortgage - 1210$

My question to ya'll...How do I determine COC on a property I've lived in and now want to make a rental?

I know COC is the amount invested divided by annual cash flow from the property; this is easy to figure out on a property you buy and then turn into a rental right away. I've used the BP calculators but the CoC calculator doesn't seem to fit in my circumstance.

Does this mean I calculate all the money I've put into the property and then figure out my expected annual cash flow (after expenses) to determine COC?

Is there a better metric to use in this instance?

I know the different in mortgage and expected rent is about 450$ and I know I need to put aside a decent percentage of that for repairs, vacancies, cap ext, etc...

Basically, I'd like some suggestions on how ya'll would keep tabs (numbers, metrics, etc) on this property to ensure that it generates positive cash flow and doesn't turn into a money suck.

Thanks in Advance,

Charlie

Joe Villeneuve · Answer

If you are going to look at them separately, that's fine. You can't apply the cost of the refi onto the first property as a way of "hiding" it from the 2nd. Your using that money on the 2nd property, and it's a loan, just like any other loan you would get, the cost of that money is applied to the property you are using it on. That means your DP is a loan, and you have to apply the loan payment to the 2nd property, since that's where it is being used. How will that impact your CF.

Charlie Lockwood · Answer

@Joe Villeneuve Thanks for your comments. Definitely a lot to think about and I appreciate the input.

I had no intentions back in '16 of renting this property out. I'm grateful that it's provided my family a home for the last 5yrs and now we're able to move to a better part of town..All thanks to this house providing the funds for the 20%. In my mind, it's amazing that I can get another property with no money down because the first property appreciated nicely.

In my newbie mind, I like to look at the two properties as separate. Although, I can see how that might not be the best way to go about it.

I'll def keep tabs/spreadsheet on rental income and all other costs associated with the property.

Joe Villeneuve · Answer

You can calculate the net cash return (or loss). This is important because you don't turn a profit until you recover your cost, and your cost is what cash you put into this.

Take all the cash you put into the first property (DP and paydown) and the cash you got out of it (COR), and that gives you the cash return on the first property. This gives you a cash return of a positive $42k over a 6 year period.

However, if you want to look at the second property as a connection to the first, then you would do the same as you did for the first property and merge the two numbers together.

The second property numbers are $100k in, with no cash out and no cash flow (yet), so there's a negative cash balance of $100k on the second property. Merged together, they give you a negative $58k cash balance, at this point.

Note that equity isn't cash...yet, and cash flow hasn't happened yet, so that doesn't count...yet. Also, if you have negative CF, it just increases the negative cash balance.

Also, you haven't mentioned taxes and insurance on the rental (2nd property) yet. That will drop CF.

Joe Villeneuve · Answer

You can't determine CoCReturn since that is an analysis that ONLY includes the first year...and there is no way can narrow down the first year since bits and pieces of what would be included in this analysis, that usually would be restricted to the first year, are scattered all over the years of ownership.

How to determine COC and other useful metrics on rental props

4 Replies