Better Understanding COCR and ROE
Investor · Seattle · Member since 2015 · 3 posts · 0 votes
Hello All,
I'm an owner of a few different rental properties. 2 multifamily and 1 single family. Seattle/Los Angeles.
Feeling confused on how to accurately calculate Cash on Cash Return and Return on Equity rates
Question is, should I combine annual cash flow as well as annual mortgage loan pay down as these
For example:
single family house. total cash invested $106k. Annual cash flow after all expenses is $10,000 (not great).
So my COC should be 1.6%.
But if you factor in the loan pay down the annual cash flow increases to 17,688.
which would make the COC 3%. (still not great).
which is it?
thx
Thank you so much for the reply Adam. The differentiation between COC and ROI is helpful. My initial question was mostly just to help me better understand how to properly evaluate my properties so that I can decide what to do next - based on what I'm seeing elsewhere in the market.
Question: How and where would you factor in the appreciation of the property? For example if my equity in the property increased by 50K the last year would you add that to your ROI?
My COC and ROI aren't terrible on this property we're using as a reference. However, my return on equity isn't as strong. As you mentioned coastal appreciation has put my equity at $570k. When you run that against the total income of $17,688 you get 3.1%.
Which does lead to your ultimate question of what to do with this info. I'm leaning towards selling this house soon and moving that equity into a variety of stronger real estate investments: syndication, or possibly building on one of my other properties where I can realize better returns. Sounds like you have clear goals based on your region and niche.
I appreciate the reply and dialogue.
@Brian Quist In you example 106k invested, cash flow of 10k (including mortgage payments) your COC return in 9.43% (10k/106k) When you add in your yearly principal payments (what I call ROI) your return is 16.69% (17.688k/106k).
I feel the question you're asking is what number should I be looking at, and the answer to that is it depends. It depends are what your goals are. Are you more interested in cash flow, appreciation, equity? What areas are you willing to invest in? Are you managing the property yourself, or do you need to hire property management. What area do you want to invest: The returns on the East and West Coasts are generally lower, but the appreciation is higher than the Midwest where I am from. Plus there are many more scenarios and goals to look at.
And your goals change over the years, currently I primarily have two goals. One is to find properties where I can wholesale or wholetail with a ROI of 20% within 3 months. My other goal is to find find rent to own properties with an annual return (think CAP rate) of 12% or greater over 20 years. When/If I get a loan on these properties the COC is way high. These are hard to find, but I am a full time investor and that's what I look for 20-30 hrs a week. Most of my properties are in C-D areas in Southwest Ohio where I am located and can manage. There will be less or no appreciation, but that doesn't bother me because I've negotiated/given the appreciation to the RTO tenants. I am more focused on cash flow.
Hope this helps.
Thank you so much for the reply Adam. The differentiation between COC and ROI is helpful. My initial question was mostly just to help me better understand how to properly evaluate my properties so that I can decide what to do next - based on what I'm seeing elsewhere in the market.
Question: How and where would you factor in the appreciation of the property? For example if my equity in the property increased by 50K the last year would you add that to your ROI?
My COC and ROI aren't terrible on this property we're using as a reference. However, my return on equity isn't as strong. As you mentioned coastal appreciation has put my equity at $570k. When you run that against the total income of $17,688 you get 3.1%.
Which does lead to your ultimate question of what to do with this info. I'm leaning towards selling this house soon and moving that equity into a variety of stronger real estate investments: syndication, or possibly building on one of my other properties where I can realize better returns. Sounds like you have clear goals based on your region and niche.
I appreciate the reply and dialogue.
Thank you so much for the reply Adam. The differentiation between COC and ROI is helpful. My initial question was mostly just to help me better understand how to properly evaluate my properties so that I can decide what to do next - based on what I'm seeing elsewhere in the market.
Question: How and where would you factor in the appreciation of the property? For example if my equity in the property increased by 50K the last year would you add that to your ROI?
My COC and ROI aren't terrible on this property we're using as a reference. However, my return on equity isn't as strong. As you mentioned coastal appreciation has put my equity at $570k. When you run that against the total income of $17,688 you get 3.1%.
Which does lead to your ultimate question of what to do with this info. I'm leaning towards selling this house soon and moving that equity into a variety of stronger real estate investments: syndication, or possibly building on one of my other properties where I can realize better returns. Sounds like you have clear goals based on your region and niche.
I appreciate the reply and dialogue.
Question: How and where would you factor in the appreciation of the property? For example if my equity in the property increased by 50K the last year would you add that to your ROI?
Yes, I would add it into the ROI, but it's hard to determine exactly what the appreciation is until you find a buyer to pay, but you can make a pretty good estimate. I would also take into account closing cost into the ROI. The property might increase by 50k last year, but how much will it cost you to sell it?
I number that I look a lot is CAP rate. It's used mainly for multifamily properties, but I use it for my rentals too because I am so focused on cash flow, and at what rate. It may not be the best for you because it doesn't take into account appreciation.
If I were you I would look at the ROI with your investment and see if alternative investments provide you a better return in relation to the risk level. I think
This would be two different metrics. Cashflow divided by Equity Invested would be the Cash on Cash return. Cashflow + Amortization divided by Equity Invested would be Average Annual Return.