12% cash on cash or 3-6% ?

Question

i’m a little confused with Biggerpockets contributors because in recent posts by Biggerpockets writers, they suggest looking for deals that generate a 12% cash on cash return. Then another article reveals the research which indicates that all except a few markets average 3 to 6% cash on cash return. Why are these conflicting messages running simultaneously within biggerpockets?  What is the sweet-spot? I understand that is only part of the equation. The other part being appreciation.

Michael Ketchen · Answer

Ken,

Every deal and every investors model is different and it is an important reason to define your own desired number and then work backwards for that exact reason. For example, I am nearly exclusively a value add Multi-family investor. I will force appreciation, refinance and keep the asset. Otherwise known as the BRRRR method. I recently completed a project however on a five unit that we decided to flip, the delta between what I could pull out in a refinance vs what I could sell it for was simply to large. The investor buying it is very experienced, a couple hundred doors I believe, and his model is stabilized long term holds. Completely different and while he will take a lower COC, 8-10%, then say my model, he also has less risk in some ways. I hope this helps. Again, define your targets and work backwards.

Alecia Loveless · Answer

@Ken Oz I believe (and I could be wrong) that Brandon Turner says he looks for at least a 12% CoC return when he’s buying an investment.

Personally, I’m investing in my local market which is pretty small, and am buying deals that are cash flowing in the range of $125-150 per door on a standard 30 year mortgage with 25% down and am seeing about a 5-6% CoC return.

Brandon says to keep looking for better deals if this is all you can get but these are good properties in very nice condition as opposed to others in my area, that will still continue to be rented at their current levels even if there is a market turn and housing prices fall.

I would also feel comfortable living in all my buildings and do in fact live in one of my duplexes that I am fixing up some as I go along that I could rent for $1500 a month were I to move elsewhere which is a great rent for Northern New Hampshire.

Theresa Harris · Answer

There are different guidelines you can use, but at the end of the day it is what makes sense to you.  Each market is different and some places you can buy inexpensive homes for $100K and rent them for $1000 while other places it would cost you $150K for a similar house and it would still rent for $1000.

I'd also avoid percentages because 5% on a $500 rent is quite different than on $1500 and yet expenses will be similar.  Think about how much you have to put down and how much you'd net each month (in $).

Michael Ketchen · Answer

Tim,

If you have $90k equity in SFR that's only netting out $1200 a year, I would seriously consider selling to scale. That is simply too much equity imo on too small a profit to keep tied up.

Tim Lucas · Answer

I've also wondered the same. I don't see how anyone is getting 12% CoC return in western WA or OR. I'm looking both places, and the best I can do is about $100 per door on a duplex. Prices are just way above market rents. Traditional CoC or percentage rules don't typically happen. You won't hit the 1% rule in these markets unless you find a sweet BRRRR. A $500k house won't rent for $5,000 per month. There are probably investors in western WA and OR who drive for dollars, direct mail, and other strategies to find homes at lower costs. But I haven't cracked that yet. Maybe someone here can share strategies that worked for them. My problem is I don't have 2-4 hours per night and all weekend to myself to drive around, buy lists, or stamp envelopes. So direct mail and other ideas have not been appealing to me. Right now I'm working with an agent to find reasonably priced duplexes. Some seem to be able to cash flow about $100 per door according to the BP rental calculator. I have a SFR in Beavercreek OR that has gone up $90k in value in 2 years, so I'm definitely factoring in home appreciation as part of the gain. But if anyone has an amazing way to get 12% CoC return at the time of purchase in these markets, do share!

12% cash on cash or 3-6% ?

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