Quote from @Casey Coffey:
Quote from @Joe Villeneuve:
OK. First, if you're getting $75/month in CF ($9k/yr), and you put $110k in cash in, your CoCR is 9%, not 9.5%.
Second, and this is the number that counts (% mean nothing, and will lead you to illusions), if you're getting $9k in cash back/year, and you put in $100k in cash, it will take you (if all goes perfect) over 11 years to recover your cost (cash). This assumes there or no CAPEX during those 11 years, which would make that recover of cash take even longer.
Third, your equity is great, but it only has true value when you access it. Until then. it's virtual money. The house owns it, you own the house. Not the same thing.
Joe thanks for the reply. I was using rough numbers in the original post. If you want to be exact, my CoC is 9.8% after everything was finalized. my plan is to do a cash out refi in the near future to increase my CoC and recycle my funds to put into another property.
Your 11 year estimate on how long it will take to recover my capital does not take into consideration an average 5% increase of rents per year. Of course capex does come into play, but I have a lot of factors on my side including most major components of the property have been replaced already, including roof replaced 2 years ago, water heater replaced 3 years ago, full house was just repiped, septic system is 5 years old, HVAC system replaced in last 7 years, i do not cover appliances with warranty in my rentals, and the tenant I placed in the property is a single dude who works 60 hours a week and just needs a place to sleep. Not to mention he is very handy so will likely handle most small repairs himself. He moved in this weekend and is already adding value to my property as he paid somebody to paint the garage and wants to install lighting in the garage that he will leave behind.
The house does not own my equity.. lol. I know where you are coming from when you say that but i am a season investor and know how to tap into and access that equity. As previously mentioned my plan is to do a cash out refi, but if I cant for whatever reason, i will do a heloc for 80% of my LTV at a rate of prime + 2% which I can then use to fund other deals. Additionally, the tenant has expressed interest in purchasing the property and if i did allow him to do that it would only be via seller finance, yes i would seller finance to him while still holding my existing mortgage.
CoCR is only calculated in the first year of ownership. So unless you plan on refinancing within the first year, the refi money doesn't count towards it.
OK. You can't count on a guaranteed annual increase in rent. You can, however, count on an annual increase in taxes and insurance. Even if you could count on the 5% increase per year you mentioned, I would be shocked if your taxes and insurance increase per year was less than that.
Roof 2 years old might need to be replaced within 10 years, water heater and HVAC may not need to be replaced, will sill surely need a number of maintenance events, ...all of which will increase your cash costs, and delay the cash return.
A tenant that does handyman will will eventually want to be reimbursed down the road, usually with rent credits. Your lease agreement should include a clause that makes the cost of repairs up to a certain dollar amount to be covered by the tenant. If not,...
Until you tap into that equity, as in turn it into cash, you don't own it,...your property does. As far as selling to the tenant goes, make sure you don't give any rent credits towards it. That can easily become financial suicide.
