Typical Cash-on-Cash returns in Phoenix metro?

28 Replies

I'm likely going to start BRRRR investing next year and since the first 'R' is 'Rehab' and I plan on doing as much of it myself, that does dictate that the properties are also local.

What I'm trying to figure out at this stage is what kind of Cash-on-Cash rate of return can I reasonably expect, if investing in the Phoenix metro area?  The quoted figures I've found elsewhere, referring to more geographically divergent locations, vary so incredibly wildly (3% to 30%!?) that they aren't very useful.

So what I'm hoping to get is some actual real numbers from people who have invested directly in the Phoenix area.  When you run the real numbers at the end of the year, what are you seeing?

And literally any amount of additional detail (actual initial cash, amount financed, location of property, amount required for rehab, etc etc etc) will also be appreciated.

Hi Kurt,

What type of properties are you looking for specifically?  Multifamily or single family residential? 

Also, what areas in the Valley are you looking?  Cash on cash returns will vary drastically depending on the neighborhoods and asset classes you are willing to work with.

Let me know a little more information and I may be able to help you out.

Hi @Chris Pike

I'm not looking at anything at all, specifically.  I'm in a self-imposed investing moratorium while I learn all I can about real estate investing.  Part of this investing is hopefully learning what kind of returns are available for what types of investing and in which locations.

So every question you are asking is precisely the type of data I was hoping to get from posts to this discussion.  That is, I was hoping that maybe somebody would talk about their multifamily unit in Glendale that they blah blah - every detail they are comfortable sharing and are realizing $350 net flow per unit with a Cash-on-Cash rate of 15.6%. And then somebody else would talk about their sfr in Apache Junction that they did a cash-out refinance with the BRRRR method, are seeing $100/mo net flow and etc etc.

That's the key.  I've been obsessively reading use cases and stories on BP from people around the country, but so far there have been vanishingly few examples of investors here in the valley.  I'm left wondering what people who are investing in Y way are doing here compared to those investing in X way.

@Kurt Granroth  Here are actual numbers on 6 Properties that we have acquired and leased out this year in Arizona.  The yearly cash flow is just the monthly multiplied by 12. In most cases for our properties the tenants pay for the on going repairs.

Harding in Coolidge, Arizona

Purchase 55k

Rehab, holding costs, closing fees, etc. 11k

Bank Loan 48k

Option from Tenant 5k

My total in $12,348.08

Monthly cash flow after all expenses 186.59, yearly 2239.08

Cash on Cash Return 18.13%

Northern in Coolidge, Arizona

Purchase 48k

Rehab, holding costs, closing fees, etc 14k

Bank Loan 38k

Option from Tenant 5k

My total in 13,893.74

Monthly cash flow after all expenses 257.97, yearly 3095.70

Cash on Cash Return 22.28%

Drew in Mesa, Arizona

Purchase 130k

Rehab, holding costs, closing fees, etc 23k

Bank Loan 104k

Option from Tenant 5k

My total in 39,435.66

Monthly cash flow after all expenses 404.02 yearly 4848.21

Cash on Cash Return 12.29%

Main in Apache Junction, Arizona

Purchase 69k

Rehab, holding costs, closing fees, etc 48k

Bank Loan $112,500

Option from Tenant 6500

My total in -1,160.34

Monthly cash flow after all expenses 97.24, yearly 1166.88

Cash on Cash Return = Infinite since I had no money into the deal

Signal Butte in Apache Junction, Arizona

Purchase 193k

Rehab, holding costs, closing fees, etc 54k

Bank Loan 235k

Option from Tenant 10k

My total in 456.80

Monthly cash flow after all expenses 403.47, yearly 4841.64

Cash on Cash Return 1059.92%

27th Ave in Phoenix, Arizona

Purchase 102k

Rehab, holding costs, closing fees, etc 20k

Bank Loan 82,500

Option from Tenant 5k

My total in 27,630.84

Monthly cash flow after all expenses 432.12, yearly 5185.40

Cash on Cash Return 18.77%

Thank you, @Shiloh Lundahl , that is precisely the information I was hoping to get!

If I may aggregate some of these numbers:

Total Price: $767,000
Capital Invested: $92,602
Option From Tenants: $36,500?
Yearly Cash Flow: $21,374
Monthly Cash Flow: $1781

Capital-to-Price Ratio: 12%
Cash on Cash Return: 23%
Total Price to Cash Return: 2.8%

I'm not sure what the "Capital-to-Price Ratio" and "Total Price to Cash Return" would be really called.  Me hand-waving could say that if I bought $1M in properties like this, it would require $120k in capital on my part and I would see cash flow of $28k/year ($2.3k/mo).

I'm not understanding two parts of these, in my extreme naivety regarding RE investing.

First, what does the "Option from Tenant" mean in this context?  I realized that that phrase means nothing to me regarding RE.

Second, is it safe to say that the Bank Loan parts aren't conventional bank loans?  I've read that I should expect to put down 20% to 30% for a conventional loan but nothing has suggested a number as low as 12%.  That implies something very different?

Thanks again!  This is wonderful information.

@Kurt Granroth I don't know what Capital-to-Price Ratio is or Total Price to Cash Return.  Option from tenant is a the way we do our rentals.  We don't just rent the properties to anyone.  We rent our properties to end buyers.  We rent the properties to people who want to own the property rather than just rent.  We collect an option amount that they pay which locks in the amount for them for a given time period (5-10 years for us).  Then they (and only they) can buy the property any time within that period of time.  

We have built relationships with hard money lenders and banks which give us favorable rates and terms. The properties that we have 0 of our own money in are properties where we rehabbed them and they increased the ARV to the point that the loan at 75% is at or less than our total into the property, allowing us to take out all of our money.

@Shiloh Lundahl - oh, a Rent to Own or Lease with Option to Buy?  I saw a title about that in the BP Forums but hadn't investigated.  Very interesting.  I suppose that's why the net cash is so high for some of them, if the tenant handles all maintenance, thus no budgeting for it?

How is the locked-in amount calculated up front, especially given such a long time frame that the tenant's option exists?

I wonder, are other local investor's seeing similar results to the ones that Shiloh has posted?  Anybody investing in duplexes or other multi-family properties?

This post has been removed.

@Shiloh Lundahl are you buying these properties with cash and then doing a delayed financing exception? I'm also curious if you are using different entities for active versus passive income? 

Originally posted by @Kurt Granroth :

@Shiloh Lundahl - oh, a Rent to Own or Lease with Option to Buy?  I saw a title about that in the BP Forums but hadn't investigated.  Very interesting.  I suppose that's why the net cash is so high for some of them, if the tenant handles all maintenance, thus no budgeting for it?

How is the locked-in amount calculated up front, especially given such a long time frame that the tenant's option exists?

 @Kurt Granroth Yes, the tenant takes care of a lot of the day-to-day maintenance of the property.  We also fix anything major that is likely to need repair within the next 5-10 years so we don't really need to budget for any cap-ex expenses either. Also, since they put $3900 - $10,000 as the option fee they tend to be pretty committed to staying in the property so we don't need to budget for vacancy or turn over.  But lets say there is a turn over.  We just put the money necessary into the property to turn it over and then we start the lease option again with a new tenant who comes in with a new option fee and we start over (all the while the underlying loan is getting paid down).

The amount that we agree upon is usually a little higher than the current appraisal, around 5-10% and the option time is 5 years or more.

@Jason Sullivan We are buying these properties in series LLCs where each property gets its own LLC. And yes, we have a separate company for flipping properties which is what my CPA suggested that we do because each company is taxed differently. Our flips are taxed differently than our buy and holds.

I'm in the process of getting a C-Corp set-up based on my CPA's advice. I'm new to the rehabbing arena and have at least a month to go before I'm ready for my first deal. I'm excited but nervous. I'm comfortable with my tax and asset protection strategy thus far. I just need to get my financing in order. I see you are in the Valley. Do you ever partner with new investors?

@Jason Sullivan I do partner with new investors.  This year we have partnered with 5 investors on flips that we have done or buy and holds where they came in to help out with the rehab costs until we got it refinanced. Send me a PM and I will explain how to partner up with us on a deal.

I tried to send you a PM and apparently I bombarded you with colleague requests. My apologies. I'm still trying to figure out this website. I have about 45 days until I'm ready anyhow. Maybe I can buy you lunch sometime before then? Have a good night.

@Jason Sullivan I'm wondering if you are setting up an actual Arizona C-Corporation, or an Arizona LLC that will be taxed as a C-Corp?

1) if it's an actual corporation, what advantages are you finding that are superior to the extremely low-maintenance Arizona LLC? ($50 filing fee, no annual reports, no annual fees)

2) what benefits are you seeing by electing a C-Corp as your tax status?   This appears to be, by far, the least popular election for real estate investors of any type.  

Not saying "you're wrong" with either, but am genuinely curious about the advantages you are seeing with these choices.  Thanks and good luck!

@Shiloh Lundahl Hi there. Also thank you for sharing your breakdown with each property deal you have done and own. I appreciate seeing other investors in the area being able to show their success in the market and guidance. When you find a home do you use the BRRRR strategy or use the rental strategy?

I had some questions in regards to your LLC. Do you form the LLC after you buy the property? Also I would like to get the info to your CPA if that's okay for future use? I'm looking at some deals right now analyzing and hoping to get my first deal done before end of year.

@Jason Sullivan I saw the colleague request the other day but no message attached to it. I just got the one colleague request from you (I think that is how the BP colleague resuest system works).  

I went a head and accepted the request. You can send me a PM now. Also, for future reference, when you send a colleague request you can send a private message along with it. Those are the ones I look at and respond to first usually.

@Anissa Hernandez my model looks like the BRRRR model but it is a little different in that I mix it with a lease option strategy model as well. I like doing it that way because I think it maximizes profits. This model let's me get cash flow on properties that normally wouldn't cash flow that much which makes buying properties easier. Last night I did an analysis of the projected profit over the next 5 years on the 16 lease option properties that we picked up this year. The projected profit is $665,800.84. I will post a pictue of the spreadsheet with the numbers and explain them.

Here is the break down of my portion of the monthly cash flow for the 16 properties that we have acquired this year (sorry it came out so small). I am doing a joint venture with a buddy of mine on these properties so the actual profits and monthly cash flow are twice as much for each property. 

The amounts that I posted above on the first 6 properties include me as holding the 2nd notes that we are creating and on the properties that we have our own capital invested. But once we sell the 5-year second position notes that perform at 11-12% per year, then we will have very little of our own capital into the properties and our return will be infinite.

We have the first 8 properties (Harding through Cactus) leased out with options to buy. We are activly working on leasing out Eloy through Burke right now and we are still rehabbing Cholla through 104th Place. So the numbers are real numbers on the first 8 and they are projected on the last 8 (but my projections have been pretty accurate to what the real numbers would be so I included them).

My portion of the monthly cash flow created is 2064.74 plus 1340.82 (until I sell all of the second performing notes) so it is $3405.56 per month with about $152,358 invested which is about a 27% cash on cash return.

All of these properties are on 5-year lease options which means that if all of the tenants exercise their option at the end of the 5 years (which statistically I know won’t happen, but if it does) I stand to have profited $665,800.84 among all 16 properties (this doesn’t include any profits that come to me from the second position notes that I am selling on some of these properties).

Originally posted by @Dan Schwartz :

@Jason Sullivan I'm wondering if you are setting up an actual Arizona C-Corporation, or an Arizona LLC that will be taxed as a C-Corp?

1) if it's an actual corporation, what advantages are you finding that are superior to the extremely low-maintenance Arizona LLC? ($50 filing fee, no annual reports, no annual fees)

2) what benefits are you seeing by electing a C-Corp as your tax status?   This appears to be, by far, the least popular election for real estate investors of any type.  

Not saying "you're wrong" with either, but am genuinely curious about the advantages you are seeing with these choices.  Thanks and good luck!

@Dan Schwartz Thanks for the question. By no means am I a tax or law professional so take what I say with a grain of salt. I'm working on the advice of my CPA. So to answer your question I'm setting up an actual C-Corp for my rehabs for a couple of reasons:

I've owned an HVAC business in the past and one really annoying thing when I needed a loan for anything was my K-1. A c-corp is a separate entity from you so it streamlines the loan process. That doesn't mean a lender will not want a personal guarantee from you. Your 1040 will not show that you own a business so a lender will not ask for your P/L. As we all know, the goal is to lessen our tax burden as much as possible. So, our business may show little to no income which could scare an underwriter and get your loan denied. I still have my day job, so any loan I need, I want the decision to be based on those merits and not include any potential losses my company may have.

There are also some generous tax deductions with a c-corp. For instance, health insurance provided to the employees can be deducted at 100%. There were others that my CPA was mentioning but that one sticks out the most.

Keep in mind that this strategy is only for "active" income. If you have "passive income" such as rentals you want a flow-through entity like an LLC. I eventually will have an LLC set-up for any passive income I acquire. Then both of those will be held by either a Nevada or Wyoming holding LLC.

@Jason Sullivan cool.  thanks for sharing.  I always like to hear what people are doing, especially when's it differs from "the norm."   Good luck!

@Shiloh Lundahl wow that number of $665k is amazing if they all buy in the 5year.   I'm going to study the worksheet you added. Thank you for the advice and how you are doing it. It definitely helps put things in more perspectives. It's good knowing that type of strategy is working here. 

@Shiloh Lundahl I'm assuming your buyers would need to come up with their own financing for purchase as well?  If they don't complete a purchase in the 5 year timeframe, would you just keep the $5k and kick them out to find someone else or do you plan on continuing to rent to them?  

Do you just market as rent to own targeting people with poor credit with the hopes they can get financing in the 5 year period then?  

Just curious how things work if they would not have the available financing or what your experience has been.  I've considered rent to own in the past, but my experience has been that even if they would give me a down payment, the amount I would take in rent would be less than their "loan" payment to me.  It seems like you have a different spin on it though.

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