56% CoCROI but <$100 Cash Flow. Would you take this deal?

15 Replies

I have a property (3/2) under contract at $48,500. It's a foreclosure and it requires $13K of work. Market rent is roughly $800-$825. ARV is 80K - 85K. I would be able to pull out the purchase price + rehab cost out of the deal. According to my numbers I have 56% cash on cash return but only $87 in cash flow per month.

Purchase Price: $62000

Monthly Rent: $825

Expenses:

Property Taxes: $500 annual          $41.67 monthly

Insurance:           $874 annual         $72.83 monthly

Property Mng:    10%                        $82.5 monthly

Repairs reserve:  10%                       $82.5 monthly

Capex reserve: 10% $82.5 monthly

Vacancy                  5%                        $41.25 monthly

Total Expenses: $403.25

Mortgage: $334.77 ($60625 in principal at 5.25% at 30 year)

Cash flow: 825 - 362 - 334.77 = $86.98


How do I view this deal? Is this something I should take or not?

Terrible misleading deal.  The CoCR doesn't justify the cash flow.  The CoCR is only as good as the ability of the property to sustain it.  At less than $100/month, it wouldn't take much to be negative cash flow...and be going backwards on the CoCR.

No.  You must have both.  They each support each other.  One without the other is incomplete.

I wouldn't buy it personally.

Also, 10% for maintenance never made sense to me.

That's correlating rent and maintenance ; two things that really don't belong together.

@Joe Villeneuve Thank you. I was having the same thought that $100 works not be worth it. I have kind of a dumb question here- if I leave 15K in the deal and don't pull out everything, I make higher cash flow and CocROI is about 15%. But putting money in the deal just to increase cash flow also doesn't make sense to me. What am I thinking wrong here? I'm looking at these properties in Montgomery, AL where my expenses as lower mainly because of very low property taxes. But in decent neighborhoods the rents for 3/2 are in the range $775-$850. How do people make properties in these rent ranges work? After all expenses I'm hardly left with enough cash flow. I'm currently hitting the 1.3% - 1.4% rule. The only place where it comes closer to 2% rule where I'll cash flow better is in very poor neighborhoods.
Originally posted by @Aman A. :
@Samir Shahani thank you for your response. What would be the right amount of reserves for capex?

 I think that it’s entirely based on the property (age, location, current state,  etc, etc) 

Do you know what happened to this kind of trade in the last downturn?  This is like buying a junk bond with borrowed money except you have a legal obligation to spend money on the house to keep it habitable.  I suggest you try landlording closer to home for your first investment.  Or buy securities.

Originally posted by @Aman A. :
@Joe Villeneuve Thank you. I was having the same thought that $100 works not be worth it.

I have kind of a dumb question here- if I leave 15K in the deal and don't pull out everything, I make higher cash flow and CocROI is about 15%. But putting money in the deal just to increase cash flow also doesn't make sense to me. What am I thinking wrong here?

I'm looking at these properties in Montgomery, AL where my expenses as lower mainly because of very low property taxes. But in decent neighborhoods the rents for 3/2 are in the range $775-$850. How do people make properties in these rent ranges work? After all expenses I'm hardly left with enough cash flow. I'm currently hitting the 1.3% - 1.4% rule. The only place where it comes closer to 2% rule where I'll cash flow better is in very poor neighborhoods.

 First of all, dump the % Rules".  They mean nothing, they tell you nothing, which is why after you use them, you still are confused where you are.

Everything you mentioned, is correct.  You're not doing anything wrong.  What you're finding out, is the driving force to your decision making isn't the property...it's the market the property is in.

Find the market (the micro-market really), that satisfies the criteria ($$$$....NOT %%%%) that you need to make an investment worth your time and money.  Then invest in the properties from that market when they pop up.

You're doing it right.  Maybe what you are finding out, is the market you're looking in, isn't the market you should be looking in.

@Aman A. I wouldn’t do this deal but you can always just refinance less money out. That’s probably what I would do to up your cash flow. Also not sure you’ll get 5.25 percent these days. I think 5.5 is closer but I guess it depends

I'm currently taking a similar approach of growing my real estate portfolio and my main goal is high yielding cash flow (at least $100/mo per unit if not higher) and a  COCROI of at least 9-10% (because that's what I can generally get in a mutual fund). Once I find investments that match my goals, I make an aggressive offer to hopefully add it to my portfolio. My goal is to accumulate roughly 100 units that match my goal of $100/unit net income per month which would set my NET CASHFLOW at $120K/yr. I am open to any size deal as long as the overall numbers match my goals. 

Personally, I love the idea of putting more cash down on a deal if it is going to drive up my cash yield, but I never put down too much cash that it would push my COC under 8%.

In my calculations, I always run the repairs at 4% and CAPEX at 6% unless the property is in poor condition or in a bad neighborhood (in which case I'm hesitant anyways to buy a rental property because of a possible volatile vacancy rate.) But my goal is to buy rental properties that will cash flow from day one. No rehab necessary.

Most of my properties sit around 1.2 or 1.3 on the 1-2% rule scale but they meet my specific investment goals. I don't worry too much about this system as a way to value my deals. 

@Aman A. This would be a quick flip for me not a hold property. 1200 in potential profit from rent on a sfr will really be negative in real life between vacancy and your big ticket items or even maintenance. One plumber will kill 3 months of profit. That a/c unit in 5-10 years will be 4 grand.. one vacancy after 2 years causing you to paint the unit again and so on. Now flip it make 15k off 65k invested in 6 months look good to me.

CoC means very little with little cash invested. $1 cash flow is an infinite CoC with 100% financing. I don't look at CoC numbers with less than 10-20% invested.

Mediocre deal.

Everyone, thank you all for your valuable advice. I called off on our contract for this property. Numbers were slim, and I will continue looking for better deals. Thank you again!