Question on COC calculation standards

4 Replies

I've been following a lot of discussion groups on social media, as well as watched multiple videos / read articles, and have a question regarding COC calculations. I've been noticing that it doesn't always seem apples to apples when I learn about the returns others are getting. The biggest inconsistencies I see are with property management and initial rehab. I find myself wondering if I should be doing two COC calculations, one for my personal returns, and the other for an attempt at benchmarking. I will elaborate below.

Not that I should be comparing myself with others per se, but I do like to know that I am generally on the right path and the best way is to see what the industry standards seem to be. 

For property management, should this technically be considered an optional/operational expense? When trying to figure out if my returns are on par with others', should I include property management, or take that into account for my personal returns/goals, but not use it when figuring out whether it's a good deal, per se? Similar to how cap rate doesn't take financing into account. This seems to be especially applicable to those with only a few properties who may not yet be using a property manager. What percentage of folks would you say probably include PM in their calculation? 

Regarding initial rehab, someone who does a full rehab (full gut, all new appliances, fixtures, outlets etc) should theoretically encounter a lot less maintenance/repair expenses for the first 5-10 years... In comparison to someone who someone who just took over and will be fixing existing items as needed. In this case, the first person's COC calculations, assuming a 'standard' 5% for repairs (or insert whatever number you want) will reflect lower returns than they will actually yield in those first 5-10 years. At that point you could technically subtract the difference from the initial rehab cost to get a more accurate gauge on COC return. How significant of a difference do you think this would make in actual vs theoretical returns?

What are your thoughts? Am I overly complicating this or could these types of considerations potentially turn what seems like a mediocre deal into a good deal, as an example? 

Thanks in advance for your input!

@Phillip Rosin

IMO, generally reclassifying an expense as something else or omitting it altogether because the investor performs the service should not turn a bad deal into a good deal. A bad deal is a bad deal.

Whether or not you charge property management to a property should not depend on whether you perform the service or you pay someone else to do it. All properties need to be managed whether or not the service is paid for. If you manage your property yourself and not charge the property for it then you're just not valuing yourself. You may be okay with that but many investors are not.

The theory of cash on cash is how much cash is left during a certain period of time (month, quarter, or annual) in relation to the total initial "acquisition" cost of the property. The definition of acquisition here is important. IMO, I have NOT acquired a property until I have possession of it and the property is in normal "operating" conditions relative to other normally operating properties in the area. If I spent $1mil to purchase a property with non-functioning plumbing then I have not "acquired" the property because it can not yet operate normally. If I then spend $500k to fix the plumbing to get the property in normal "operating" conditions then my total acquisition costs is $1.5m, so $1.5m would be the basis for my CoC calculation.

Cheers... Immanuel

Thanks for that feedback @Immanuel Sibero . For the adjustments, I guess I was mostly speaking to rehab where you purchase a property where everything is in working condition, but decide to preemptively replace old appliances, as an example, which are still functional enough to remain in use but leave the property less appealing and will likely require repair or replacement in the near future. I basically paid the $2,000 I would pay to replace those appliances over the next 5-10 years up front, which will reduce my actual maintenance costs during that time period and increase my "acquisition" cost. Maybe it doesn't really make that big of a difference overall. 

On the topic of property management, I was just curious if most investors include allowances for that in their COC calcs, whether they actually use it or not. I didn't mean to include this in my last statement regarding evaluating a deal. Sorry for that confusion.

Originally posted by @Phillip Rosin :

Thanks for that feedback @Immanuel Sibero . For the adjustments, I guess I was mostly speaking to rehab where you purchase a property where everything is in working condition, but decide to preemptively replace old appliances, as an example, which are still functional enough to remain in use but leave the property less appealing and will likely require repair or replacement in the near future. I basically paid the $2,000 I would pay to replace those appliances over the next 5-10 years up front, which will reduce my actual maintenance costs during that time period and increase my "acquisition" cost. Maybe it doesn't really make that big of a difference overall. 

On the topic of property management, I was just curious if most investors include allowances for that in their COC calcs, whether they actually use it or not. I didn't mean to include this in my last statement regarding evaluating a deal. Sorry for that confusion.

Then you're overcomplicating this. If you are including a cash cost to you, that you are actually not paying but using it as in a "what if" scenario, then you are calculating two different things. Actual COC and "potential" COC.

...and, COCR is based on your cash going in and cash coming to you within the first year ONY of a deal.