Newbie question - Acceptable Cash-on-Cash Returns?

[Linda Tong]

Hello everyone, 

Complete newbie here, currently looking for the first small MFH deal to house hack in. 

I'm in the greater Boston area (looking at further out towns as limited by my first-timer budget), what would be an acceptable CoC return on a small MFH in this market? I have heard the "generally 8-12 percent CoC" but I'm not sure if it applies to the crazy market I'm in. I've been using my BP calculators but nothing has come even close to the 8-12 CoC.

Any knowledge share & advice is much appreciated!

[Drago Stanimirovic]

Hi Linda,

The Boston real estate market is known for high property prices and lower rental yields compared to other regions. While an 8-12% CoC return is ideal, it's often not practical for first-time investors in competitive, high-demand areas like greater Boston. Returns in the range of 4-7% are more typical for such markets, especially for smaller multifamily homes. These properties usually come with higher acquisition costs and tighter margins, impacting initial CoC returns.

If you'd like further clarification or help navigating your specific investment, I'm here to assist.

Best,
Drago.

[Jaycee Greene]

Hi Linda. Welcome to BP. I'm happy to walk you through this if you want to send me a connection request/DM. I can also share some other return numbers I use with my investor/developer clients.

[Tim Ryan]

yeah, it's tough out there these days. However, I remember my real estate coach from several years back say "you just need to keep working it, the deal will come". It was frustrating but he was right and I began finding (or maybe) seeing the deals.

Read that again, I began "seeing" the deals, insinuating that they were always there. Hmmmm.

One more word of advice: you will learn as I did that you need to have the 8-12% return when you buy. That's great advice and in most cases should be adhered to. However, I have bought properties that had far less, but I knew I could raise rents immediately or decrease expenses immediately, then I got to the 10% coc return withing a couple of months. 

Real estate investing is a business. Your job is to do better than the seller did. Find those opportunities and you'll find many deals.

[Aristotle Kumpis]

It all depends on what you are trying to do and what your goals are. There is no ideal return. I have some clients that are fine with a 5% return, and others that want nothing less of 10%. You also need to look at the big picture over 3-5 years. And not just what kind of cash flow today will bring you. Once you factor in things like tax benefits, and appreciation, your total ROI is usually pretty good compared to other vehicles out there.

[John Morgan]

In good appreciating areas I'll go as low as 5% CoC with properties I like. It'll look like a home run in 5 years if you can wait and don't need a ton of cash flow right away. Some people need a good return in year one. I'm willing to just break even on year one and two if I like the area and think it has potential for rent and appreciation growth in the next 3-5 years. If you can survive off your W2 then go for it. If you need to retire and live off your mailbox money, then invest in class C hoods in cheaper areas. You won't get appreciation, but you can get plenty of cash flow off crack shacks. I have 19 SFR with low cash flow at first when I bought them in Dallas. And I have 10 cheap SFR in the hood in Arkansas that give me the 2% rule. The cash flow is great, but these houses won't appreciate much in the next 10 years compared to my Dallas properties that are in high demand.

[Joe Villeneuve]

Ignore the CoCR.  All it tells you is your first year's return in cash based on your cost (cash in), as a percentage.  Percentages tell you nothing of value, and they will lie to you at best.

Look at how many years it will take you to recover your cost (cash in).  That will tell you how long it will take before your deal becomes profitable.  Base what the correct number of years works for you should be based on your plan, which will tell you what you are planning to do next.

[Allan C.]

@Linda Tong Boston is the wrong market to use CoC metric. CoC works well in Midwest markets that cash flow more than appreciate. As Joe says, CoC is just a spot in time and you need to understand long term cash flows.

In my markets (similar high appreciation to Boston), I typically start with low CoC… and often negative cash flow. But within 3-5 yrs it'll flip to positive cash flow, and 5+ yrs out CF will be significantly higher than most other markets.

I don't use CoC as a metric since it's meaningless for my markets, but I use IRR and NPV. IRR is helpful for markets with changing cash flows. I also like Joe's recommendation to see how much time it takes to recover your investment. I suggest calculating time to recover 1x and 2x investment as simple screening metrics if you're not comfortable using IRR.

[Nicholas L.]

@Linda Tong

if you're house hacking, you want to, very roughly, pay about as much or less than you would if you were renting, and then when you move out, you want it to break even.

so as an example - if you'd pay $2000 to rent, but instead you could house hack, and you'd still owe $1500 or $1800 or whatever against the mortgage net of rent, you house hack.  and then ideally when you move out and rent all units / the entire place out, you break even.

[Dan H.]

I do not like first year COC as an investment criteria. In most markets the best COC will be in the worst areas. The rent to price ratio is highest due to 1) the risks involved with that class of tenant 2) poor appreciation outlook 3) poor rent growth outlook.

Note for a long hold, the best cash flow will typically be achieved in the property that has the best rent appreciation.  This is very unlikely to have been the property with the best year 1 COC.  

My own belief is that the best rent ready purchases for long hold have 0% year 1 COC or even negative. it is a tough RE market. Price to rent ratios are at all time low (2 separate recent studies show this) and the interest rate is near high for this century. Tough combination for initial cash flow.

Good luck

[Tyler Munroe]

Hi Linda! If you're looking for those returns in the greater Boston area you will definitely have to push out a bit - think Lowell or even Manchester, NH. Anywhere closer the CoC is looking like max 5% for on market deals, if they even cash flow at all these days. I feel a better metric in this market is total ROI which will factor in CoC, mortgage paydown, and appreciation. Happy to connect and send you my property analysis spreadsheet if it helps.