What is a realistic cash-on-cash return to shoot for?

Question

Hey everyone!

I am in the process of writing my business plan and am to the point where I want to define my CoC return that I will aim for.  My main goal is to build wealth and I am not all too concerned with immediate cash flow as I will continue to work (at least initially).  However, my short term goal is to purchase 3 properties in the next 3 years, and this will obviously happen quicker the higher returns that the properties provide.

My initial thought was to shoot for 12% and not even look at anything that projects a return below 10%.  I live in the Milwaukee area and will be focusing on finding duplexes in this area.  Is this a realistic goal?

Thanks for all your input!

Steve L. · Answer

I think you can do 15-20% cash on cash all day long.  Usually the challenge for investors is coming up with down payments on 30 properties (or even 4 for that matter).

If you're buying a turnkey 100k house, 80k loan is a payment of $405.35/month.  Let's say 20k downpayment and 3k in closing/misc costs.  To earn 15% you need $287.50/month above $405.35 mortgage payment.  To earn 20% you need $383.33/month.  So you need to find a house that nets $692.85/month after expenses. For simple math, lets just use the 50% rule.  To generate $692.85/month you would need at least $1,385.70/month in rental income.  So to achieve these numbers you would target a house that you can buy turnkey for 100k that rents for $1,400/month or so.

The way a lot of us members on this forum do a lot better is: You buy the same house as the above example, except it needs 20,000 in work.  You pay 55,000 cash (or hard money loan).  You put in 20,000 in repairs.  The house is worth 100k.  You refinance 80k out after 6 months of seasoning.  Now you have 0 cash in and your cash-on-cash is very exciting.

Dan Romnek · Answer

@Steve L. I appreciate your response. I think that it is realistic to find properties in the 75-100k range, but the rents I'm seeing for those properties are 1100-1200 a month.  That's still a nice return , but not the 15-20% that we are talking about.  Obviously I will keep looking for those properties that will return 20% but I want to be realistic with my expectations and what I am taking from this conversation and my research is that 20% is possible but 15% may be more realistic for my assumptions. I will keep everyone posted on my progress!

Andrew Syrios · Answer

I would see 12% as a bare minimum. Aim for something more like 15% to 20% (unless you are talking A properties or something like that)

Engelo Rumora · Answer

Hi Dan,

I believe you can get a much higher net cap rate if your doing the work yourself.

Turnkey cap rates for B class properties tend to be between 12%-15%.

I just picked up one which will show a 22% net cap.

A class area.

Thanks and have a great day.

Dan Romnek · Answer

@Steve L. I do plan on financing at 4.5 over 30 years.

My goal is to own 30 properties freen and clear and be able to live off of the income.  I will be focusing on finding undervalued properties and fix them up to be able to rent. There seem to be a few areas that are going to be good for finding these properties in this area.  Do you think 15-20% is realistic?

Beau Cote · Answer

Sure Dan. Multiple exit strategies help mitigate risk and offer opportunities to increase your overall profitability.  I did not ever think about wholesaling properties when I started either, but as it turns out I have way too many deals to handle myself and colleagues that need deals. Therefore, I wholesale.

In fairness, instead of wholesaling what I don't want I offer all my deals for wholesale and keep what does not sell. Either way, I make money and my business grows. But by not cherry picking my deals it makes me a true wholesaler and increases confidence of my buyers that they are getting the best of my deals.

Good luck and feel free to follow up or get in touch when needed.

Dan Romnek · Answer

@Beau Cote thanks for the response.  I will make sure to have multiple options when purchasing. I hadn't really planned on wholesaling but may look into it more if it makes sense for a particular deal.

Steve L. · Answer

I think you should be aiming higher.   Are you planning on using financing?  Do you know what rate the financing will be?  If you primary goal is to "build wealth" how do you plan to do that?  Find deals under market value?  Get great amortized financing?  Increase rents on under performing properties?

Beau Cote · Answer

I went to school in West Allis and have just moved to a new northeast metropolitan area similar to that of Milwaukee, so I will take a stab a helping you with your questions.

Returns are generally market specific and each market has it's unique advantages and opportunities. Therefore, I would suggest finding a few local reia's and asking current investors in your area.

However, being similar to my area and also being fairly familiar with the Milwaukee area I would explore rentals, wholesaling, rent-to-own, and options (sandwich options, etc...). There may be not as much opportunity on flipping. Flippers here make a good return but on low profile homes <$80K. The higher profile homes are more difficult to sell and therefore carry more risk.

I have been doing well seeking discounted properties from motivated sellers, getting them under an assignable contract, and immediately offer to sell the property at wholesale. If the property does not sell for a modest wholesale fee, then I purchase the property as a low profile flip or rental. If you buy the unit at the right price you should be comfortable executing nearly any exit or holding strategy.

What is a realistic cash-on-cash return to shoot for?

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