Cash on cash return for Phoenix

8 Replies

@Angela Cooney Phoenix isn't as much as of a cashflow market compared to smaller cities in the midwest and parts of the south. Investing here is more about long term stability, rent growth, low vacancy, and if history continues, a lot of price appreciation over the years. You'd be disappointed if you compared CoC returns here to say, a property in Kansas City.

Cash on cash doesn't factor in the principal payments lowering your debt, nor equity gains through appreciation. 

In my opinion, it may be more productive to calculate ROI or IRR which would be a more complete picture of your returns, both while holding the rental property and when sold (making some assumptions for realistic year over year appreciation).

@Jimmy Dang a good COC return here in Arizona is infinate, although it may not be that much money.

In other words, I may be able to BRRRR a property and take out all of my cash out of the property, and still be able to cash flow, but I may only cash flow one or two hundred dollars a month on that property.

Depends on size, leverage, and location really. Is it a 300-unit Class A multifamily property at Main and Main? Is it 4 units in Avondale? I know you said it was on the smaller end, so I'd say north of an 8% cash-on-cash is a good target (without knowing more info about your investment). 

Also, @Ryan Swan was slightly incorrect in saying cash-on-cash doesn't factor in principal payments. The cash-on-cash calculation is your Net Income / Equity, and Net Income is any cash flow after debt service. It's a great way to measure what is essentially the dividend yield of a property. Hope that helps!

@Zachary Rall maybe my statement wasn't clear, but it still was correct. Cash on cash calculation treats the entire PI payment as an expense rather than breaking out principal and interest separately. 

Case in point, you could have a rental property that breaks even, meaning the net income after all expenses and debt service is $0.00. That would be a current CoC return of 0%.  Bigger picture, the rent is still covering all expenses PLUS your entire mortgage payment. Maybe you hold this cash-flow-poor property for 10 years and then sell it for a nice gain and reap the benefits of those years of a tenant building up equity for you plus any market appreciation. That's why I stated that CoC by itself does not take into account the benefits of equity build up and price appreciation. 

Hey @Ryan Swan ,

You're absolutely correct about cash-on-cash ignoring the benefits of paying down principal. I misunderstood your statement as being about the actual calculation of cash-on-cash, rather than the benefits/drawbacks of using the metric. That one's on me.

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