CoCR % , CAP metric for deal analysis

3 Replies

Hi All

Sorry but I am a new investor , trying to get started in Multi family investing. 

1)While analysing a deal , does Cash on cash return matter a lot , does the deal need to have a COCR return of 10% or more for a stable positive cash flow? ,

2) Does buyer CAP rate of 6.67% for south Jersey , Bucks county PA is more reasonable?



#1 - only you can answer how much CoC matters to you. There is no standard. Your property needs to be cash flow positive and be able to make debt payments once it's stabilized (90%+ occupancy). Most lenders require debt coverage ratio (NOI/debt payments) to be at least 1.3 on a stable property.

#2 - Cap rate is market- and property class- specific. Ask a few brokers what the current cap rates are for a given area and different property classes.

Here is a deal that I was analysing and this question of CoCR % came up

1 bed unit =4

annual rental income : 50k , not much room for future growth

expenses : 12k

80% Mortgage ,

annual debt service : 34428

Net cash flow after debt service : 3500

asking price : 555k

With 20% down ,the CoCR comes to about 3.9%. 

am I wrong with this calculations? Or is this CoCR% worth it for a starting investment

thanks a lot

3.9% is too low unless there is a way to increase it. Based on your "not much room for future growth" statement, you won't be able to increase it more than inflation. You did not provide expense break down but I suspect that $3K/year/unit is too low and the real expenses may be higher thus making CoC go negative. So, overall, I would pass on this deal.
Besides, it's a 4-plex which is valued by comparable sales just like SFH. You won't get any extra value by increasing NOI.

You can get much better return than 3.9% if you simply loan your downpayment money at 10%+ or invest it in an apartment syndication.