is 5% CoCR in this hot market good enough?

Question

We are newbie investors and have been scouring the Triad area for the past three months like hawks. We've been running numbers on every deal that pops up on any of the MLS's as well as talking to our agent for off market ones.

I guess my question to the BP community is in today's hot market is everyone still trying to target 10% CoCR at the very least? We're not seeing a ton of properties breaching even 7% at times. Rents are barely able to scrape the 1% rule due to intense competition on houses. We've put six offers so far and each has ended up going the other way even though we have on an average bid 5% over listing price.

It's crazy - should one just sit tight for sometime or still go for deals yielding 5%-7% CoCR?

Thanks for all the advice in advance

Murtuza

Jayme Currie · Answer

@Murtuza Bengali I think the Triad is still full of deals yielding >10% CoC returns. What areas are you looking in?

Murtuza Bengali · Answer

Wow blown away with the responses so far already. Thank you @Ryan Karel and @Humberto Valle.

Yes we are trying to enter each deal with an open mind and even though we had set out trying to find properties below 100K that needed some TLC of $10k-$15K to start off, we've begun to realize that we might need increase our overall budget.

The houses that come on the market under $100K need a lot more than just TLC and being out of state first time investors we realized that we might end up biting off more than we can chew. So now we're looking at houses around $125K but then that means that the budget we've set aside for investing this year might also need to be adjusted upwards accordingly.

Also when I say CoCR i'm typically referring to just the first year return. Is that a good mark or one should project the cash flows and appreciation out to an average of five years and see the total return instead?

Which one to investors look at more and try to beat the 10% mark?

Humberto Valle · Answer

Some markets are still offering near 9-10% yield. It seems to me that maybe, just maybe you need to keep looking, change strategy possibly a bit and go for that $100k mark or near it. Keep hitting the streets, network, ask around and be shameless about you being an investor. Your $100k deal will come, if you're in a deadline and or are flexible - consider other markets too maybe :)

Good luck!

Pat Lulewicz · Answer

@Murtuza Bengali where/who are you getting your rental rate info from? And might be helpful to share what kind of other expense ratios/numbers you're estimating to get to your CoC. Properties in the Triad, especially under $100K, are hitting the MLS weekend that'll get you that CoC; many of them will even have tenants in place which provide you cash flow right away so you don't have to deal with the uncertainty of vacancy. If you're trying to hit a CoC of 5%-7%, you can generally buy a house up to $200k-$215k and still make those numbers work, plus your appreciation potential will be higher (of course dependent on specific location you buy in) most of the time around that price point.

Humberto Valle · Answer

You have a loaded question. it's great!

First, a little expectation and clarification housekeeping; this is a great newbie question because most new investors hear or read that we have to go for 1% test or 2% rule or the 8% COC to make our deals work, but even the guys in their podcast or the books will always tell us; be contextual and adjust. Adjust if needed, adjust based on your goals, your market, your financing vehicle, etc. If you are flexible with the timeframe, then you don't have to settle - keep looking and expand onto other markets if needed to find a unicorn property. If you want to scale your portfolio, do what most - and adjust. Some properties won't give you instant positive cashflow, especially in today's market unless is forced somehow through some minor upgrading/rehabbing being done. Go for CoC that works for YOU.

Even appraisers for Hard Money Lenders have to go check the homes in person because numbers can hide opportunity.

Second; Again, if your goal is cash flow, the general real estate market condition makes finding a 10% CoC a little more challenging than a few years back. But not impossible, what's needed from you is pretty much just flexibility and the ability to commit to homes that need some work maybe even.  Depending on a few variables, although not always the case a home that yields maybe .09 or .085 right now may be a solid 1.5% or 2% any other time. So just a word of advice when it comes to the 1% rule, be careful with how you analyze the actual number results - if you analyze just off numbers you will be missing out on a lot of deals possibly.

Third and final thought, hopefully, I've been a bit helpful thus far - Be flexible with your 5% rule. I can't count the number of clients who have come to me wanting to stay within 5% increase margin but that number means nothing to most agents or sellers. I personally haven't won an initial bid by simply offering that as a base rule. If anything. Go with your gut, go with your numbers - as an exercise I would even recommend you didn't look at the sales/asking price. Go off the numbers, the comps, the financials, debts on properties, financing vehicle and you come up with an offer that is fair based on your numbers. Then compare to realistic possible values and offer based on that.

I'm a Texas realtor, but for strategy or structuring offers, etc. feel free to message me. If I'm available I always reply :)

*sorry for typos and syntax, responding quickly just to provide some guidance hopefully lol*

Ryan Karel · Answer

Well this is a good question. The 1% rule is more of a guide than a rule. In terms of coc return its really your call. Every real estate transaction is different. You have to ensure that at the end of the day you are confident and comfortable with the return you will be making. Some investors might be fine with a 3-5% coc return, while others won't touch anything under 8%. Remember coc does not take into account things like mortgage pay down and appreciation. Really you have to look at all aspects of the deal and make sure it works for you. If it makes dollars it makes sense!

is 5% CoCR in this hot market good enough?

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