Rental Property Investor · Palm Beach County, FL · Member since 2016 · 150 posts · 40 votes
Happy New Year BP community,
I started to analyze rental properties with the rental property calculator on BP. One house in particular that I am currently analyzing, after playing with the numbers a bit, I got my monthly cash flow to approximately where I want to be. The cash on cash ROI on the other hand, its less than 4%. I know Brendan mentions in his videos that he wants to be somewhere between 12%-15% ROI. I am planning on holding on to my rental properties for a long time. Since this is the case, do I really have to worry about the ROI? Can I just focus on the monthly cash flow? Any advice would be extremely helpful.
You have to look at both. Positive cash flow is just the start. After that, you want to see how your money is working for you.
Brendan's expectations for return won't be the same for someone living in a different part of the country like Boston. Every area and every investor has a different set of expectations. Starting out, 2% or greater is fine. When you have a larger portfolio, you expect more for your money.
2% is just an average benchmark. If your assumptions are good for expenses, financing, rental income, then you have a property worth exploring.
But even 2% is cutting it close. If you end up having to pay for a new roof or new HVAC after only owning for 1 year, that's not long enough time to have cash put to the side.
But like I mentioned, every area is different. In some areas, it's hard to even find a rental that will have positive cash flow due to prices rising faster than rental income. So, you have to have solid analysis to keep yourself out of trouble.
You have to look at both. Positive cash flow is just the start. After that, you want to see how your money is working for you.
Brendan's expectations for return won't be the same for someone living in a different part of the country like Boston. Every area and every investor has a different set of expectations. Starting out, 2% or greater is fine. When you have a larger portfolio, you expect more for your money.
2% is just an average benchmark. If your assumptions are good for expenses, financing, rental income, then you have a property worth exploring.
But even 2% is cutting it close. If you end up having to pay for a new roof or new HVAC after only owning for 1 year, that's not long enough time to have cash put to the side.
But like I mentioned, every area is different. In some areas, it's hard to even find a rental that will have positive cash flow due to prices rising faster than rental income. So, you have to have solid analysis to keep yourself out of trouble.
Rental Property Investor · Palm Beach County, FL · Member since 2016 · 150 posts · 40 votes
9y
Thank you @Jeff B. and @Christopher Phillips for the answers. It looks like by your answers that CoC ROI is something that I definitely need to take that into consideration when analyzing a property. Going back to what Christopher said, is there a way I can find out what an acceptable CoC ROI return is in Massachusetts? Sorry for the basic question but I am completely new to real estate investing.
If you are arriving at the cash flow level you want by increasing equity you are losing money not increasing cash flow.
Mortgage rates are less than 5%, value of equity is 10% as a minimum as opportunity value. For this reason every dollar of equity is costing you a minimum 5% in lost income on that dollar.
Once you pay a 10% return on the equity off the top of your rental income your cash flow disappears.
Rental Property Investor · USA / NZ · Member since 2016 · 1k+ posts · 812 votes
9y
In the USA I target 9-10% CoC minimum and cashflow of min $300-$400 per month for SF and $150-$125 per door for 2-4plex respectively.
What short of monthly cashflow did you end up with with the 4% CoC return ?
Rental Property Investor · Palm Beach County, FL · Member since 2016 · 150 posts · 40 votes
9y
Thank you @Hadar Orkibi for the insight. The cashflow was $464 and it is a duplex. May I ask where in the US are you expecting to see 9-10% CoC ROI? are you expecting to see 9-10% in any market in the US?
Rental Property Investor · USA / NZ · Member since 2016 · 1k+ posts · 812 votes
9y
No I don't expect it in any market only in markets when the cashflow is better.
You would Not get it in New York city or LA etc which are mainly capital growth markets.
Can I ask how much deposit did you put it the deal? Cash/ $ number and % of purchase price ?
If your Net cashflow is say 5k a year but you put 100k deposit / down payment that's 5%. CoC.
Rental Property Investor · Palm Beach County, FL · Member since 2016 · 150 posts · 40 votes
9y
I guess I dont really understand CoC ROI. @Hadad Orkibi, if you got the numbers I got, $464 cash flow and 3.52% CoC ROI, would you purchase the property based just on these two numbers? If my monthly cash flow is where I want to be but the CoC ROI isnt, is this a bad deal?
Just wondering how you got to 464 a month cash flow but only a 3.52% ROI?
The ROI just shows your money is not working well for you. For example, a typical savings account is about .5% and index funds may give you a 6-7% return. This 3.52% is much better then a savings account, but still relatively low.
Boston does have the appreciation potential, depending on how close you are to the city, or if you are on the outskirts of Boston Mass.
Did you analyze this as you are renting out both units?
Thank you @Jeff B. and @Christopher Phillips for the answers. It looks like by your answers that CoC ROI is something that I definitely need to take that into consideration when analyzing a property. Going back to what Christopher said, is there a way I can find out what an acceptable CoC ROI return is in Massachusetts? Sorry for the basic question but I am completely new to real estate investing.
The 'acceptable' ROI is ANY number that makes you smile when you get your bank statement every month.
There are those here on BP with SFRs with rather small ROIs - - a couple of hundred per month. Don't compete with others or set YOUR goals by anyone elses standards.
To answer @Christopher Phillips, I havent seen the property and in the MLS, its not saying there is anything wrong. The pictures look ok and I am estimating the closing costs to be around 5k. TO be on the safe side, I put aside 10k for any work the house needs, even though the listing agent doesnt specify anything.
Closing costs in Boston for a house around that price would most likely be in the $10K range. You need to get some better estimates.
Getting a house ready for rent takes a walkthrough. Even a turnkey property will need a few dollars.
Assuming your down payment of $72,980 + $10,000 closing and $5,000 rehab you're looking at $87,980. Annual cash flow $5,568 /$87,980 would be 6% cash on cash return.
What's the detail behind your cash flow number of $464 per month?
Rental Property Investor · Palm Beach County, FL · Member since 2016 · 150 posts · 40 votes
9y
Im sorry, its 364 cashflow. I was playing with the numbers at 299k purchase price because at 364,900, the numbers were awful which leads me to believe that this property is over priced. This house has been in the market for 283 days.
Rental Property Investor · Broken Arrow, OK · Member since 2016 · 1k+ posts · 1k+ votes
9y
I keep reading all these posts where people are buying properties for more then ARV, am I missing something? There are way too many better deals out there, I'm never going to pay more then ARV for any property. IMO, Its not a good investment. Find deals that you can be all in between 70-80% of ARV tops or move on to a better deal.
Philadelphia, PA · Member since 2015 · 177 posts · 64 votes
9y
When I was starting to first analyze a property I would the same as you. Look on MLS and think of hypothetical costs to try to make the numbers work. This is a good way to learn the ratios by playing with the numbers but don't take those returns and make a decision on that. They are guesses at best and you need to really get an understanding for what you can expect for your area in order to analyze the deal. That and actually walking through a property to identify rehab costs.
As to the ROI vs CoC question, this is how I picture it. The CoC is the return you are getting on the money you invested and not how much money you are making. $400 monthly cash flow might seem like what you are looking for. But if I told you that you could buy the house down the street and get the same $400 per month but buy it for $150K? Your original CoC return doesn't sound so sexy anymore right? That is the use of the ratio. It helps you compare how investing in one property will compare vs investing your money in another property, or the stock market, a CD at your bank.
While I agree you shouldn't just chase a magical number and never buy a property, you also need to know if the money you are investing in something could have been better spent elsewhere. If your goal is to simply own an investment then $400 return sounds fine. If your goal is to own a good invest then you need to look at your CoC as well as other ratios such as CAP.
Hope this helps. I know the numbers can get confusing at the start. I suggest you check here if there is a REA meeting near you. Local folks can help you in understanding what your markets return look like so you can compare.
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
9y
@Tarcizio Goncalves, you wrote: "I got my monthly cash flow to approximately where I want to be" - even though it was only going to represent a <4% return on your ~$70k savings?
The ONLY reason I can think of to recommend something like that is IF the asset itself is (or will become) worth significantly MORE than the $300k purchase price. (Like $100k+ more!)
Because THEN at least you'd have the capacity to refi - to get all your $70k BACK!
And even then, I'd be wanting that low CoC to still be positive - even AFTER the refi! Good luck...
Developer · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes
9y
If you are only making 5-6% COC return on your money that is a really bad investment from my perspective and not worth it. You can get that return in the stock market and the stock market doesn't call you that the heat isn't hot enough or that there is a leaky faucet.
Rental Property Investor · Boston, MA · Member since 2016 · 82 posts · 27 votes
9y
I am new to REI but this is how I evaluate the profitability of an investment. Hopefully this makes sense and is useful for others. I'd also be interested in hearing what people think of this analysis. It's hard to show calculations on a forum post but I will do my best to make things clear.
Formula:
(End of Period Property Value * 0.95 + Total Period Cumulative Cash Flow – End of Period Loan Balance – Initial Cash Investment) / Initial Cash Investment
Concept:
End of Period Property Value * 0.95 is the amount you can expect to receive if you sell the property, after selling costs
Then add in everything you’ve made (or lost) in monthly cash flow. This is the Total Period Cumulative Cash Flow
Then you want to subtract the amount you have to pay back to the bank upon sale. This is the End of Period Loan Balance
Then subtract the money you put into the property up-front (Initial Cash Investment = down payment + closing costs + rehab costs)
This will give you your realized dollar profit after you have sold the property. This is a good figure in itself. I also divide this number by my Initial Cash Investment and then annualize to find my annualized % return over the period.
Example (Assuming a 1-Year Holding Period):
End of Period Property Value = ARV * (1 + expected inflation)
Things get a bit more complicated once you move past a 1-Year holding period, and I’ve used certain assumptions to get to these figures. I am happy to explain further if there are any questions!
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
9y
Well to clarify, the cash-on-cash is much more accurate of your true ROI. The reason being-- let's say you buy a super expensive house in Los Angeles (since I live here I know how expensive they really are) and you pay all cash for it and then rent it out. Let's say you pocket $2000/month from rent on it. Well that sounds like great money, but what if you have to spend $750k to buy the property? Then if you compare those numbers, it's not as good when you consider the cash-on-cash of that (or in this case it would be the cap rate too). Like if you compare that to banking $2000/month but you only had to put $300k into a house. So in both of those cases you are making $2000/month in cash flow, but whether that number is good or not is in comparison to how much you had to put into it. That comparison is what the cash-on-cash is going to look at.
If I were willing to settle for a very low cash-on-cash, I'd want to make sure there's a reason I'm doing that. Like, there needs to be some major benefit that I'm getting by owning that property to make up for the fact that I'm getting a low return on my money.
So technically the answer to your question doesn't necessarily have to say that only the cash-on-cash matters and not the cash flow, but I think it really does. With the idea of what I mentioned--cash flow is good or bad depending on how much you had to put into it to get it.
Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
9y
This post is really making me cringe. Cash flow is the most useless number I can think of to analyze the potential of an investment. You can change it instantly by changing the down payment, or mortgage terms (length of mortgage) which are completely arbitrary numbers to start with. Put 100% down and even $200/month rent will generate you $100/door cash flow. So what if you paid $100K for that $200 rent? You got your cash flow target. Happy now? If you take a 10 year mortgage vs. 40 year again your cash flow changes dramatically. Did the investment suddenly become better because you are paying it off over a longer term? At the very least look at ROI (Free cash + equity pay / investment) or more accurately IRR which is the sum of all cash flows over the holding period plus difference in value at the end points. A proper IRR also takes in to account discount rate and cost of capital but even if you ignore that you are still doing far better than the 99% of people here chasing the mythical $xx/door cash flow.
Virtual Assistant · San Diego, CA · Member since 2016 · 35 posts · 15 votes
9y
@Tarcizio Goncalves: Congrats on finding that first potential property through DOING !!! Way to go ! I also suggest the best R.O.I. is by getting your real estate license online as it doesn't take long and you will have the basic knowledge on real estate. Just getting a real estate agent license on the side will help open your eyes, along with doing about 3 or 4 transactions under a Broker. Then, just do the same thing, ONLY for yourself. You will have a list of contractors at that point, experience, contacts, networks, and more knowledge of the whole process. That's what I am doing. Also, managing the properties yourself is a set of skills that you will need to learn or sub out to a PM because you will need the basic contracts, leases, and legal disclosures. Do you have a mentor in the area to help you ? BTW... agents get 6% so you will also save yourself half the commission $$$ by representing yourself in a transaction.