Going from 17% to 34% CoC ROI - Am I missing something?

16 Replies

A rental property I bought last year and just getting refinanced. Here are the numbers for before and after. If I am to remove the vacacy and maintenance factor (considering the lease is for 2 years and I have a home warranty that the tenant pays deductible for - the ROI shoots up to 45%)

Initial Purchase Post Refinance
Purchase Price $ 105,000 Appraised For $ 144,000
Paid at Settlement $ 34,000 Cash Out $ 26,060
Updates $ 9,000
Total Cash Investment $ 43,000 Post Refi Cash Investment $ 16,940
Rent $ 1,450 Rent $ 1,450
PITI $ 600 PITI $ 741
HOA $ 35 HOA $ 35
Vacancy and Maintenance $ 145 Vacancy and Maintenance $ 145
Expenses $ 780 Expenses $ 921
Monthly Cash Flow $ 670 Monthly Cash Flow $ 529
Yearly CF $ 8,040 Yearly CF $ 6,350
Less Home Warranty $ 529 Less Home Warranty $ 529
NET Yearly Cash Flow $ 7,511 NET Yearly Cash Flow $ 5,821
CoC ROI 17% CoC ROI 34%
       

Am I missing something here? Would you say this is an exception or typically achievable? With these kind of returns who needs to invest in stock market! (I understand diversification)

I guess copy paste from excel doesnt work here...

Welcome to REI! Beats the pants off the stock market in my opinion. And that doesn't even include the insane tax benefits and future equity build.

It looks correct for now. That is a great return so far!

Do keep in mind your vacancy and maintenance will wind up being higher over the long term. I always calculate 1 month vacancy per year. You may go two years without a vacancy, but you may take 2 months to evict/clean/market when it does happen. 

The maintenance is hard to calculate, and I usually call it $100 per month on my newer properties. I just had the joy of paying $800 for a HVAC repair. I find my maintenance/repairs come in big chunks like refrigerators, heat pumps, water heaters, and on and on. Luckily, they don't happen very often, but its easy to eat up $1,200 when things go wrong.

I think in time you may see your forecast is a little optimistic. Your expenses look low to me. It is hard to tell becuase you lump PITI together. You normally do not do that when analyzing a properties Financials.

You have not included anything for management.  There is nothing wrong with managing you own property.  However you are fooling your self if you think the investment is earning a given rate of return when it is you time and effort to manage that is earning some of the return. Congratulations of the deal.

@Austin Lee  @Ned Carey  

Thanks. I kept only 10% as vacancy and maintenance as this is a newer property and I already have a home warranty ($100 deductible) and the tenant is responsible for the deductible.

I have had to spend 2-3 hours per month across all my properties so far so there is not much time being spent. 

The breakdown of new PITI is:

Principal and Interest : $547.22

Taxes and Insurance : $193.59

Since you cashed out some equity at the end of a year, another way to look at it is that your Year 1 ROI is about 78 percent and your Year 2 ROI is 13.5 percent. Cash on cash, your entire return for the two years will be nearly 92 percent, or over 38 percent annually. Not bad, especially considering after the cash-out you still increased the equity in the property 38 percent.

@Carter M.  not sure I am following you...could you please explain your calculations?

You had $34K in equity at purchase and the property value increased $39K from from $105K to $144K, making the new equity value $73K. You took out $26K from this, so your equity is now worth about $47K, a 38 percent increase.

In Year 1, your cash return is $7511 plus $26,060, so $33,571 on an initial investment of $43K, so an ROI of 78 percent. In Year 2 you make $5821 on the $43K, or 13.5 percent.

On a cash basis you put in $43K and get out about $33K, so around 92 percent over two years, or a compounded average yearly return of 38 percent per year. 

@Carter M.  

Perhaps its my lack of financial knowledge, but I am failing to understand how we can treat a cash out as a return on investment, it isn't something I earned.

Also, in year 2 how can I now calculate ROI on initial investment when I already cashed out most of it?

A cash out is certainly a return on investment and often the best (and biggest) part. You must consider any and all cash flows (positive and negative) when calculating ROI.

For example, consider a property that you acquire $50K for capital appreciation only. You don't rent it out, but sit on it for 5 years then sell it for $100K, making $50K. You would definitely consider this cash-out a return, yes? In this case your ROI would be 100 percent over the lifetime of the investment.

Cashing out part of your equity in an investment is no different. In your case, you consider both the rental income and the equity dividend (during your re-fi) as your return in that year. In other years, you'd just count the rental income. If you ever sell off the property, you just add your net gain (after repaying debt) to your running cash-flow tally to calculate total return. 

Originally posted by @Carter M.:

A cash out is certainly a return on investment and often the best (and biggest) part. You must consider any and all cash flows (positive and negative) when calculating ROI.

 Carter,

The problem with your calculation is the $26,000 taking out is borrowed money. It is a net return of zero on a balance sheet. Borrowed money is not a "return on investment".  

You consider all incoming and outgoing cash flows to calculate IRR. Until such time as the investment is liquidated out you cannot calculate the IRR because you do not know the final payment at sale.

@Ned Carey

Hi Ned, 

The $26K doesn't originate from the debt, it comes out of the increased value of the property. It's basically a dividend paid out of equity. Re-financing is just the method used to unlock some of the appreciation in value.

You are right that we can only calculate IRR when an investment has been liquidated. But we can calculate ROI during any period (year) or cumulatively over the lifetime of an investment, and the geometric rate of return will equal the IRR at the end of the investment.

I'm impressed by the return Pawan has made on this investment. Not the kind of numbers I've been seeing here in Los Angeles, but if anyone can teach me where to look, I'd be grateful...

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