CoC return on a STR?

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CoC return on a STR?

Jordan M.
KS · Member since 2019 · 33 posts · 12 votes

Hey everyone! I'm going for my first STR, and was curious to what kind of CoC return you like to see with your property? What is the minimum return you would like to see before you move forward?

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Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
5y
Originally posted by @Collin Hays:

Luke that always begs the question “10% of gross rents or net”?  Net being after your mortgage, taxes, utilities, insurance, repairs, and maintenance.  

There is only one way to calculate CoC, but obviously it is affected greatly by all the things you mentioned. More importantly, it is affected by how much cash you have into the deal, which is what @Luke Carl was implying. CoC is calculated using net income divided by cash into the deal. I purchased a short term rental last September using my line of credit, with only $5000 into the deal. I furnished it for around $7000, which I took as a 100% tax write off last year. All total around $12,000 into the deal. My net cash flow over the last year was $13,000 after all expenses, including debt payments. That is over 100% CoC, but keep in perspective I entered the deal with very little equity in the property. Had I paid all cash for the purchase, my numbers would have been much different. I would have had $137,000 into the deal and $20,000 cash flow for CoC return of 14.5%. If you can minimize cash into the deal, you maximize CoC return, but also reduce cash flow. The property in my example is self managed and is a small house near a hospital. Luke and other people in this business are buying larger properties in vacation destinations. That means higher up front cost and higher daily rate. It also means more net cash at a given CoC rate. If Luke is getting 10% CoC return with $200K into a deal, that is $20K. It is still more total cash than I am getting 100% return. That means he is more cash for probably the same effort as I am getting less cash. Time is a factor here too.

There is no right or wrong answer with numbers like CoC return, but understanding how the numbers work and what they represent is critical. Just saying a percentage is good or bad without context is not as useful. Of course we all want to maximize return. Just be aware other things figure into the long term equation like tax benefits, equity growth through debt pay down and appreciation.

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  • Luke CarlPro Member
    Rental Property Investor · Tennessee Florida · Member since 2016 · 4k+ posts · 5k+ votes
    5y

    Depends on how you finance. 

    In 2021 anything over 10% is great. If you can’t beat that with short term you’re in the wrong market! 

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    3Reply
  • Collin HaysBusiness Member
    Property Manager · Gatlinburg, TN · Member since 2020 · 3k+ posts · 4k+ votes
    5y

    Luke that always begs the question “10% of gross rents or net”?  Net being after your mortgage, taxes, utilities, insurance, repairs, and maintenance.  

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  • Dave StokleyBusiness Member
    Property Manager · Cleveland, OH · Member since 2015 · 705 posts · 799 votes
    5y

    I’m projecting 24% on my most recent purchase, a 3-bed 1.5 bath suburban single family. That’s $1,000 monthly cash flow (net of all operating expenses) on a $50k cash investment, which includes purchase, rehab, and furnishing. 

    3Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    5y

    This same question has been asked many times on here already.

    4Reply
  • Jordan M.
    OP
    KS · Member since 2019 · 33 posts · 12 votes
    5y
    Originally posted by @John Underwood:

    This same question has been asked many times on here already.

    You’re right, I’ll do more research before I post. In all fairness I’m sure everything has been asked multiple times! 

    6Reply
  • Kenneth GarrettPro Member
    Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
    5y

    @Jordan M.

    COC is always calculated based on net or you might call it profit after all expenses. It is the ability to pay yourself back. If you had to put 100,000 down plus expenses and your annual cash flow was $20,000 which is definitely possible for STR you have COC return of 20%.

    2Reply
  • Mike Shulman
    Real Estate Agent · orlando, FL · Member since 2009 · 159 posts · 121 votes
    5y

    Are you planning to finance and if so what would your terms be like. Hard to calculate cash on cash return if I don't know if you're purchasing all cash or financing.

    0Reply
  • Jordan M.
    OP
    KS · Member since 2019 · 33 posts · 12 votes
    5y
    Originally posted by @Mike Shulman:

    Are you planning to finance and if so what would your terms be like. Hard to calculate cash on cash return if I don't know if you're purchasing all cash or financing.

    All cash.

    0Reply
  • Paul Sandhu
    Investor · The worst town to live in, KS · Member since 2016 · 4k+ posts · 4k+ votes
    5y

    6 months of gross rent should pay for the purchase price of the house.  At least it does for me.

    4Reply
  • Jason Stoltzfus
    Rental Property Investor · Lancaster, PA · Member since 2018 · 56 posts · 57 votes
    5y

    I calculated the CoC on my first STR purchase last year and it was something like 130%; I paid myself back in the first year. Covid seems to have really heated up certain rental markets, taking what used to be off-seasons and turning them into in-season.

    Anyway, it makes shopping for a STR right now challenging. Like I can look at the numbers from last year on a cabin in the Poconos and see that they did 100k in revenue, but there's no guarantee that it will continue in the next year or two as Covid (potentially) tapers off and the market normalizes.

    I'm looking at places now and aiming for a place that can generate at least a 25% CoC, and hopefully if the market retracts that's enough buffer to keep it profitable.

    2Reply
  • Mike Shulman
    Real Estate Agent · orlando, FL · Member since 2009 · 159 posts · 121 votes
    5y

    In Central Florida I'm seeing numbers between 10% and 15% coc return.

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    5y
    Originally posted by @Collin Hays:

    Luke that always begs the question “10% of gross rents or net”?  Net being after your mortgage, taxes, utilities, insurance, repairs, and maintenance.  

    There is only one way to calculate CoC, but obviously it is affected greatly by all the things you mentioned. More importantly, it is affected by how much cash you have into the deal, which is what @Luke Carl was implying. CoC is calculated using net income divided by cash into the deal. I purchased a short term rental last September using my line of credit, with only $5000 into the deal. I furnished it for around $7000, which I took as a 100% tax write off last year. All total around $12,000 into the deal. My net cash flow over the last year was $13,000 after all expenses, including debt payments. That is over 100% CoC, but keep in perspective I entered the deal with very little equity in the property. Had I paid all cash for the purchase, my numbers would have been much different. I would have had $137,000 into the deal and $20,000 cash flow for CoC return of 14.5%. If you can minimize cash into the deal, you maximize CoC return, but also reduce cash flow. The property in my example is self managed and is a small house near a hospital. Luke and other people in this business are buying larger properties in vacation destinations. That means higher up front cost and higher daily rate. It also means more net cash at a given CoC rate. If Luke is getting 10% CoC return with $200K into a deal, that is $20K. It is still more total cash than I am getting 100% return. That means he is more cash for probably the same effort as I am getting less cash. Time is a factor here too.

    There is no right or wrong answer with numbers like CoC return, but understanding how the numbers work and what they represent is critical. Just saying a percentage is good or bad without context is not as useful. Of course we all want to maximize return. Just be aware other things figure into the long term equation like tax benefits, equity growth through debt pay down and appreciation.

    7Reply
  • Alex S.
    Investor · Metro East of St. Louis (Illinois) · Member since 2016 · 259 posts · 211 votes
    5y

    @Joe Splitrock knocked it outta the park!

    There is so much complexity when it comes to returns. CoC is a pretty good metric, but it still requires an understanding of what you are actually calculating.

    @Jordan M. My only add to this discussion is that your returns (however you calculate them) should significantly exceed long-term rental returns. A well-executed STR investment won't take much management effort, but it is more work than LTR and you should be compensated for that.

    I've been exceeding 30% CoC for all my STRs in Northern California and the Midwest thus far.

    4Reply
  • Dave StokleyBusiness Member
    Property Manager · Cleveland, OH · Member since 2015 · 705 posts · 799 votes
    5y

    @Joe Splitrock perhaps I'm misunderstanding, but you can't just exclude the proceeds from an LOC from your CoC calculation. That money has an opportunity cost and thus should be considered cash invested.

    0Reply
  • Gerald Pitts
    Lender · Asheville NC · Member since 2016 · 470 posts · 317 votes
    5y
    Originally posted by @Jordan M.:
    Originally posted by @John Underwood:

    This same question has been asked many times on here already.

    You’re right, I’ll do more research before I post. In all fairness I’m sure everything has been asked multiple times! 

    I also feel like some past answers are dated, and new answers can be useful. COC from a year ago may not be possible today for example.

    2Reply
  • Shawn Regnier
    Realtor · Los Angeles, CA · Member since 2017 · 99 posts · 97 votes
    5y
    Originally posted by @John Underwood:

    This same question has been asked many times on here already.

     The same answer has been given many times on here already.

    3Reply
  • Timothy Sammon
    Member since 2018 · 9 posts · 0 votes
    5y

    @Paul Sandhu

    What market is that?

    0Reply
  • Jefferson Brown
    Investor · South Jordan, UT · Member since 2016 · 89 posts · 72 votes
    5y

    Hey @Jordan M., as has been mentioned it totally depends on how much you put in but we have a ratio we use to determine if a property is a good investment and Id be happy to share that with you (its similar to the 2% rule but modified for STRs).  Feel free to message me directly.

    1Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    5y
    Originally posted by @Gerald Pitts:
    Originally posted by @Jordan M.:
    Originally posted by @John Underwood:

    This same question has been asked many times on here already.

    You’re right, I’ll do more research before I post. In all fairness I’m sure everything has been asked multiple times! 

    I also feel like some past answers are dated, and new answers can be useful. COC from a year ago may not be possible today for example.

    Then only look at the many discussions from the last 30 days on this subject.

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    5y
    Originally posted by @Dave Stokley:

    @Joe Splitrock perhaps I'm misunderstanding, but you can't just exclude the proceeds from an LOC from your CoC calculation. That money has an opportunity cost and thus should be considered cash invested.

    It is not cash, it is a loan. I included the loan payment in my calculation. It is no different than a mortgage, which you also would not include as cash in a CoC calculation.

    0Reply
  • Paul Sandhu
    Investor · The worst town to live in, KS · Member since 2016 · 4k+ posts · 4k+ votes
    5y
    Originally posted by @Timothy Sammon:

    @Paul Sandhu

    What market is that?

     Coffeyville KS.  Home of CVR Energy. A refinery. 

    0Reply
  • Jordan M.
    OP
    KS · Member since 2019 · 33 posts · 12 votes
    5y
    Originally posted by @Jefferson Brown:

    Hey @Jordan M., as has been mentioned it totally depends on how much you put in but we have a ratio we use to determine if a property is a good investment and Id be happy to share that with you (its similar to the 2% rule but modified for STRs).  Feel free to message me directly.

     Messaged you!

    0Reply
  • Angela Yan
    Rental Property Investor · San Francisco, CA · Member since 2017 · 207 posts · 138 votes
    5y

    never purchased a deal that wasn't double digits COC. knock on wood.

    1Reply
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