Is 4-5% CoC annual return to low?
Member since 2021 · 19 posts · 7 votes
Hey everyone ,
I am a newbie investor. I am looking out of state because where I live in California is just to expensive. As a newbie I am looking at homes that are "turn key" and could get 4-5% annual CoC. I know people get 8-15% or more but have to do all the rehab and dealing with contractors. Being I'm not all that seasoned yet would 4-5% ready to go be a bad idea?
Curious on peoples thoughts on this one. Not home runs but it does get my money working.
COC is mostly useless. Would you rather make 100% yearly return on a $1 investment or 50% on $10k, or 25% on a $1million.
All real estate investments should eventually hit infinite return after a cash out refi.
That being said, the first year really doesn’t matter. If you pain to hold the property for 10 years figure out what your average return will be over 10 years with rent increases and appreciation. (Try to figure out where you’ll be in 5 years, that’s probably your average.)
Ps. If your interest rate is above the 4-5% return you’re getting you can increase your return by simply borrowing less.
@Matt Perez, I would not consider CoC returns that low.
If you go to the bank and put your money in a CD right now you can get 5% return. Of course with real estate you get tax breaks and hope for additional market appreciation BUT you also are at risk of losses as well unlike a CD at the bank.
Never use percentages to judge returns in RE. They tell you nothing of true value, and will lie to you
Never use percentages to judge returns in RE. They tell you nothing of true value, and will lie to you
Joe
What do you use as “true value” factors then?
COC is mostly useless. Would you rather make 100% yearly return on a $1 investment or 50% on $10k, or 25% on a $1million.
All real estate investments should eventually hit infinite return after a cash out refi.
That being said, the first year really doesn’t matter. If you pain to hold the property for 10 years figure out what your average return will be over 10 years with rent increases and appreciation. (Try to figure out where you’ll be in 5 years, that’s probably your average.)
Ps. If your interest rate is above the 4-5% return you’re getting you can increase your return by simply borrowing less.
The house is only about $126k but been on market for 5 months. Other homes in area the same are about $150k. I did look at refi in 6months (the minimum time) I would leave about $9k-$10k in the house after that short time.
It might help to make sure we are all using the same vocabulary. When you say COC what do you mean exactly?
I calculate my return on RE as a combination of:
1. Appreciation
2. Cash flow after debt service from rents
3. Principal pay down
4. Depreciation and other tax related benefits.
Including all of these factors means that I usually see better than 30% returns on my investment annually.
As @Bill B. said - cash returns is mostly useless for judging an investment (after meeting a minimum bar for cash flow). The other aspect of return on investment are very real and spendable, just not as liquid as cash.
Matt. Are the other homes selling? If so, why isn’t this one? There has to be a reason people are paying $25k more for the other properties. It could be real like foundation problems, old roof, bad lot, etc etc. Or it could be artificial like bad pictures, scrubby yard, or some other $1,000 problem. But figure it out. The market isn’t made up of people who can’t see a $24k discount for no reason.
So with that said I'm probably doing more just ROI. Return on my cash invested after debt services . So down final cashflow divided by down payment
It might help to make sure we are all using the same vocabulary. When you say COC what do you mean exactly?
I calculate my return on RE as a combination of:
1. Appreciation
2. Cash flow after debt service from rents
3. Principal pay down
4. Depreciation and other tax related benefits.
Including all of these factors means that I usually see better than 30% returns on my investment annually.
As @Bill B. said - cash returns is mostly useless for judging an investment (after meeting a minimum bar for cash flow). The other aspect of return on investment are very real and spendable, just not as liquid as cash.
That's not correct. Read the words, or should I say, look up the definition of "cash". Also, it's only calculated for the first year
It might help to make sure we are all using the same vocabulary. When you say COC what do you mean exactly?
I calculate my return on RE as a combination of:
1. Appreciation
2. Cash flow after debt service from rents
3. Principal pay down
4. Depreciation and other tax related benefits.
Including all of these factors means that I usually see better than 30% returns on my investment annually.
As @Bill B. said - cash returns is mostly useless for judging an investment (after meeting a minimum bar for cash flow). The other aspect of return on investment are very real and spendable, just not as liquid as cash.
That's not correct. Read the words, or should I say, look up the definition of "cash". Also, it's only calculated for the first year
I know what it means, I didn’t say the above were cash, I said they were returns. What I was asking was whether the original poster could clarify what he meant by cash on cash. People often neglect to consider many facets of real estate returns.
It might help to make sure we are all using the same vocabulary. When you say COC what do you mean exactly?
I calculate my return on RE as a combination of:
1. Appreciation
2. Cash flow after debt service from rents
3. Principal pay down
4. Depreciation and other tax related benefits.
Including all of these factors means that I usually see better than 30% returns on my investment annually.
As @Bill B. said - cash returns is mostly useless for judging an investment (after meeting a minimum bar for cash flow). The other aspect of return on investment are very real and spendable, just not as liquid as cash.
That's not correct. Read the words, or should I say, look up the definition of "cash". Also, it's only calculated for the first year
I know what it means, I didn’t say the above were cash, I said they were returns. What I was asking was whether the original poster could clarify what he meant by cash on cash. People often neglect to consider many facets of real estate returns.
Hey Matt,
"Too low" is relative. We all have our own unique goals, risk tolerance, and time commitment. If 4-5% CoC works for you then that's great.
For me, it doesn't make much sense. If I'm investing for cash flow I like to see 8-10% unlevered CoC returns and much higher than that if I'm using leverage.
You can easily put your money to work today at 4-5% returns in far more passive stuff than real estate. For example, there are plenty of great dividend stocks that pay annual dividend rates that match or exceed that.
If you're simply trying to put money to work you have a ton of options. If you have a passion for real estate you can do far better but it will take a bit of work.
It might help to make sure we are all using the same vocabulary. When you say COC what do you mean exactly?
I calculate my return on RE as a combination of:
1. Appreciation
2. Cash flow after debt service from rents
3. Principal pay down
4. Depreciation and other tax related benefits.
Including all of these factors means that I usually see better than 30% returns on my investment annually.
As @Bill B. said - cash returns is mostly useless for judging an investment (after meeting a minimum bar for cash flow). The other aspect of return on investment are very real and spendable, just not as liquid as cash.
That's not correct. Read the words, or should I say, look up the definition of "cash". Also, it's only calculated for the first year
I know what it means, I didn’t say the above were cash, I said they were returns. What I was asking was whether the original poster could clarify what he meant by cash on cash. People often neglect to consider many facets of real estate returns.
Hey Matt,
"Too low" is relative. We all have our own unique goals, risk tolerance, and time commitment. If 4-5% CoC works for you then that's great.
For me, it doesn't make much sense. If I'm investing for cash flow I like to see 8-10% unlevered CoC returns and much higher than that if I'm using leverage.
You can easily put your money to work today at 4-5% returns in far more passive stuff than real estate. For example, there are plenty of great dividend stocks that pay annual dividend rates that match or exceed that.
If you're simply trying to put money to work you have a ton of options. If you have a passion for real estate you can do far better but it will take a bit of work.
Biggerpockets in 2017: cash on cash return is life. Buy real estate for cash flow or be a forever idiot.
biggerpockets in 2024: who cares about cash flow, you simpleton? CoC return doesn't matter. Why would it matter? Of course it doesn't matter.
Hey Matt,
"Too low" is relative. We all have our own unique goals, risk tolerance, and time commitment. If 4-5% CoC works for you then that's great.
For me, it doesn't make much sense. If I'm investing for cash flow I like to see 8-10% unlevered CoC returns and much higher than that if I'm using leverage.
You can easily put your money to work today at 4-5% returns in far more passive stuff than real estate. For example, there are plenty of great dividend stocks that pay annual dividend rates that match or exceed that.
If you're simply trying to put money to work you have a ton of options. If you have a passion for real estate you can do far better but it will take a bit of work.
setting aside the CoC question for a second - I am skeptical that this random property you 'found' is a good deal. as others have said - everyone else has passed on it. unless you know something they don't, you should pass too.
you also mentioned refinancing - but unless it's significantly rehabbed, which you said you didn't want to do, there is no reason / point to refinancing. refinancing is actually expensive - you'll pay thousands of dollars in points and fees just to do so.
finally - i know those low price points in other markets are tempting but they come with their own risks.
https://www.biggerpockets.com/forums/48/topics/1160450-run-i...
https://www.biggerpockets.com/forums/48/topics/1159104-overl...
yep - I call it the 'pivot.' David Greene is now hammering investing for equity, and Brandon Turner even said in a recent podcast with Ryan Pineda that rental properties are not a good investment.
Biggerpockets in 2017: cash on cash return is life. Buy real estate for cash flow or be a forever idiot.
biggerpockets in 2024: who cares about cash flow, you simpleton? CoC return doesn't matter. Why would it matter? Of course it doesn't matter.
I disagree with this one. I think it depends on your REI status. For newbie, cashflow still matters especially if you don't have a lot of capital to play with. It's harder to grow without cash. But for seasoned and well funded investors, stable equity investing is preferred since they're less risky and more passive.
It's just harder to find cash flowing deals right now since rehab costs and borrowing costs are more expensive. So either adjust your offer to meet your return criteria or keep looking.
yep - I call it the 'pivot.' David Greene is now hammering investing for equity, and Brandon Turner even said in a recent podcast with Ryan Pineda that rental properties are not a good investment.
I would consider more than just the cash on cash return. When I bought my first property I was obsessed with hitting a cash flow number. Turns out that 4 years later the appreciation of the house is 10x what I have made in cashflow over those same 4 years after repairs and everything else that comes with a rental property.
As a result, I now look for properties that cash flow enough to make sure I can keep the house long term. Make sure I have some reserves for each property, and then zero in on properties in highly appreciating markets. It is my opinion that long term appreciation either market or forced is what makes you wealthy, not $200-$500 a month in cashflow.
Hope this helps!
This all helps . I have enough money to get going in a lower price market and keep some in reserve for whatever. Shopping B & C neighborhoods in the KCMO area. My wife and I both work good W2 jobs in the San Francisco Bay Area. We are both union workers so we have about 10 years to go and close our pensions, which we will do. I am looking for long term buy and hold at this point. Something to help build long term wealth for my kids and eventually when I get more time and $$ keep building up the portfolio. I have 2 kids 12 & 15 so we’re busy parents plus I enjoy coaching which I do so spare time is minimal. I’m just trying to get a sustainable investment going now so in 5 years when I have more time and some equity built up I can start to make the moves to scale up more.
if you can, go there in person, maybe even more than once. walk the streets, meet the agents and property managers, jam a whole bunch of showings into a weekend. so many CA investors buy properties sight unseen and expect everything to just magically be done for them. while i know that is what is promised, it just doesn't work that way in many cases.