Cash on Cash ROI calculation on existing homestead

4 Replies

I may purchase another home this year for me and my family to live in and convert current single family home (purchased 8 years ago) into my first rental. Normally for the Cash on Cash calculation, I would need to determine how much my down payment, closing costs & rehab costs were to calculate my total investment. My question: is this something I still need to calculate for my situation? I mean would I need to go back 8 years and remember how much my down payment was along with closing costs at that time? In addition, would I need to calculate How much principal payments i have paid over the last 8 years and add that to my down payment and closing costs in order to calculate my total investment to date?

@David Luna - run your current property thru the BP rental calculator. And use your current equity for the down payment. If the house is worth $200k and you owe $150k, run the calculator with a purchase price of $200k with a $50k down payment. See how it comes out. Would it make sense with current conditions? This can give you some comparison?

Also, run a manual calculation with your current mortgage payment, and your current equity as the cash in to get a ROI.

What I would want to see is, 1) does my property cash flow as is then 2) could the equity in my property get me a better return elsewhere. 

@David Luna When I'm looking at an investment I try to use a "neutral" figure. So, for me, it's always 75/25 LTV on the property. You probably know "fair market" for you home to a reasonable degree so that 25% of that value could be used as the initial capital. After that you can just build a pro-forma like any other property and figure out where you end up. One of the reasons that cash-on-cash presents some challenges is that 3.5% down owners *usually* look like they get awesome returns! Meanwhile, someone who pays cash for a property (for whatever reason) looks like they have extraordinarily low returns. Both extremes are accurate for those individuals making those deals but you certainly don't want to juxtapose those two properties/situations and use a single metric (like cash-on-cash) to decide who is the "smarter" investor or what is the "better" investment.

Doing what you suggest will allow you to have a rental property while only having to make a small downpayment (e.g. 5%) on your new residence. This is nice in comparison to having to pay 20-25% down to buy a new rental property, regardless of what the ROI is.

Gentlemen, Thank you so much for the feedback. I really appreciate the insight. I am fairly new to BP, and like it so far. Think it may be time to go Pro! I’ve been doing research over the last 5 months. Think it’s time to take action! 

Join the Largest Real Estate Investing Community

Basic membership is free, forever.