Return on initial equity vs. cash flow

[Kenneth LaVoie]

Hi All
I know most of the accepted metrics, like the 50% rule, $100 per door per month, 2% rule, etc. I am seeking both single family homes in decent areas at a discount, with appreciation potential (i.e. decent middle class neighborhoods, blue collar, not white) as well as multi units. considering commerical (above 4 units) but leaning twoard 2-4 with favor toward tenants paying own heat (not common here in maine) -

I am having some trouble finding true $100 per door cash flow. What I do is use all the KNOWN expenses for a property, but use my own 8% for mgmt. and another 8% for maint. (15% for lower income multis above 4 units) and another 8% for vacany. This usually results in about a 62-72% expense ratio (vs. the 50%) for multis and about 42% with SFRs.

Now! Lets say I decide to buy a SFR or Multi, it only cash flows $20 per door per month. Can I look at the expected Return on initial equity to see if it's still a decent buy? For clarity, I figure conservatively for SFRs -- 2% annual increase in income, 3% for expenses and 1% for appreciation. but many of the deals I have turned away are showing a 15% COC return (return on my spreadsheet being paydown, tax benefit, appreciation and cash flow) / initial dp plus closing plus repairs (if i don't do purch. plus improvement loan).

I want GREAT deals but I also don't want to do tons of hard work and turn down a bunch of REALLY GOOD deals. Any thoughts would be great!!

I have found a few buildings that are really cheap, but I don't feel comfortable yet doing tons of rehab. we're talking 2 unit, low income neighborhood, 37,500 with owner financing, out of state owners -- but it needs work! And frankly I am STRONGLY attracted to tenants and neighborhoods that are more decent, generate fewer problems, etc.

[Jon Holdman]

There's no simple answer to that. It depends on your short term and long term goals. Mine is to accumulate properties betting (and, I do mean betting) on long term value increases. I also think there is a high risk of inflation, and real estate has been a good hedge against high inflation.

I don't see how you can get to a 14% cash on cash return with $30 per unit per month, $360 per year. With a 14% return, that means you can have only $2571 invested. Now with you $37.5K duplex and owner financing, maybe that works.

You have to consider, though, that a tenant is a tenant. Even if your COC return is high enough, its still just $30 in your pocket.

Also keep in mind that you WILL have some big expenses in addition to the ones you list. Occasionally, you will need a roof or heater or some such. You will have an eviction. You will have a tenant bug out and leave a mess. With one duplex over a year, maybe one of these will happen, but most likely not. With 20 units, though, something will be happening all the time. If you have 100 units, you're probably going to be doing an eviction every month, or paying to have it done. You'll be making a major repair every month or two. So, account for those expenses in these early purchases.