Cash on Cash Return Breakdown Please!?

Question

Can someone break down cash on cash return to me? I've read a few books since I started getting into REI in November and have started analyzing properties. I'm a veteran and plan to use my VA loan or do a 3.5% FHA loan or 5% Conventional loan and also will be using a grant that allows me to put 3/4/5% of the purchase price down towards closing costs / down payment. Which in turn means I'm putting maybe $2,000 down towards a $150,000 property. So when I run the numbers for certain properties (looking at MFH), my cash flow is great, but the cash on cash return is awful. Is this because I'm putting very little to nothing down? Any help/advice would be great!

Adam Drummond · Answer

basically if you're using less money out of pocket.. it will make your cash on cash returns look better.  make sure you're including your closing costs that you're paying for out of pocket as well, and any money that you are using for immediate repairs.  i will give you an example of a deal im working on now.

a duplex that im trying to buy for 35k.  total rent is $800 per month, but after i pay mortgage, taxes, insurance, management, money set aside every month for repairs, etc i end up with just $200 per month cash flow net.  i multiply that $200 x 12 months in a year.  my annual cash flow is $2400.  My money out of pocket including closing costs, repairs, and closing costs are going to be about $10k.

$2400 / $10k  = 24% cash on cash return

Adam Drummond · Answer

@Kenneth McKeown

https://www.youtube.com/watch?v=T_7vhsSBi7c

the above video is a biggerpockets video where they break down analyzing rental properties.  hope that helps.

Imran Ahmed · Answer

Hi @ Adam Drummond just bumped into this..but your numbers look interesting to me. Where is that 35k property generating 800 on rent..is hat in your Greenville area? Reason I am asking I just stated and interested to get something in the south and Greenville/Colombia popped up couple times..but never been there or have no idea of the market. Is it getting positive net migration lately? Hows the cashflow market ? Thanks for your input if you still around

Kenneth McKeown · Answer

That's the total number with closing costs Richard C.. I receive a grant that allows me to put free money upfront down on a property since I'm a teacher (the catch is my interest rate is higher - however I plan to refinance out eventually anyways to throw the capital back into the property on a lower % loan and to get rid of PMI). With that being said.. $2,000 would be the complete or of pocket cost for me. Now in regards to rehab, the property currently is being leased out to two individuals.. one is moving out and I would move into that unit. Eventually my plan will be to refinance out to flip it and turn it back into a SFH to sell, or refinance out and do minimal upkeep to continue to rent it out i move out (situation I mentioned above where I would refi out to get rid of PMI). This all being said - if my offer is accepted for the property I'm looking at... but nonetheless it doesn't seem like my first purchase I'll be putting much money down at all anyways.

Dan Krupa · Answer

@Kenneth McKeown, if you are a math major/teacher skip the COC ROI. That number is good for the first year only.(to be honest) Find the internal rate of return or the IRR.  Don't forget to evaluate the time value of money. The less in, the better. As long as you are not over leveraging and you have reserves. I am a vet too, best of luck to you brother.  PM me if you have any questions.

Kenneth McKeown · Answer

@Brent Coombs my first offer is on a house in an area that is highly sought after and significantly under market because it needs some work to receive its potential (find out if offer is accepted today). It's in good enough condition to rent out currently and live in - but it's a converted duplex from a SFH sand id have to finance (HML out) the rehab more than likely down the road for a flip if I decided to go that route.. or sit on it a few years, rent it out while living in it while doing minimal repairs, then refi out when I have enough capital to pay for the repairs. The other option is I could always put some of my own money down + appreciation over time could build enough equity to get 20% and refi out. I'd probably see which is faster over time and go that route. These are all ideas with the potential offer I have on the plate - if this offer doesn't go through I plan to use this next option. (Or this next option is my second purchase plan - if the offer goes through).

My second purchase I'm hoping to move from my initial purchase to a 4-plex and use my VA loan after roughly 6-9/12 months. (I know the primary residence obligation states 1 year, but you must move into a VA loan house within 60 days (giving me some leeway) and I can always co-occupy the two (live in new VA owned 4-plex mostly while spending weekends or summers in both). I've also thought what the guidelines are regarding AirBnB'ing.. whether or not that's considered "living" in the unit if you AirBnB it for certain days, and the off days you live in it. (The VA is another roughly 0% down purchase, and I'll use the same teacher grant that gives you 3-5% of the total purchase price to use towards closing costs/down payment) And I'm planning on sending out direct mail for these potential leads. That's where I plan to start at least.

Lots of ideas running through my head - but I like the idea of not putting much money down.. AND still receiving cash flow (or living in it and receiving a nearly free mortgage since I live in - all while putting hardly anything down).

Brent Coombs · Answer

@Kenneth McKeown, if the "cash flow is great" taking all your expenses into account (including vacancy allowance, repairs and property management), even when borrowing almost ALL of the purchase price, then of course, your CoC MUST be even greater!

(I don't know why you thought 180% CoC was "awful"?)

Of course, ALL your figures will be skewed for the year that you'll be obliged to live there.

And you won't be able to refi out of that loan until you reach at least 20% equity.

Thank you for your service. I mainly worry that you won't seek the "bargain" you need if you want to repeat the process on a regular basis. Hint: Seek BARGAINS! All the best...

Richard C. · Answer

@Kenneth McKeown Instead of just the $2000 down payment , you may want to add on to your total investment with closing costs, rehab/repairs you will be doing right away, and other miscellaneous stuff that you can think of. I think it's better to over estimate a little than underestimate when running the numbers to play it safe.

Michael Evans · Answer

The calculation is correct.  The cash-on-cash return is usually applied based on a cash purchase.  What you just proved is how the power of leverage can boost your cash-on-cash return, and for me the cash-on-cash return is what matters.  I always use leverage in my real estate deals for the following reasons:

• Increases our cash-on-cash returns (as demonstrated above).
• Shifts risks to lender in the deal goes bad.
• Allows better money management.  I mean money management from an investor's view point of limiting your investment in any single investment to less than 5% of your total investment. So if you have $100,000 to invest, you wouldn't put more than $5,000 into any single investment.  Hard to do with real estate unless you're using leverage.

Stay Blessed!

Adam Drummond · Answer

@Kenneth McKeown

Cash on Cash Return Breakdown Please!?

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