Hard to find deals that give any positive CoCROI

[Brian Cheng]

I just started to practice analyzing deals ( used up the free 5 trials for rental calculator, so basically made an excel using old youtube videos on the 4 block technique figuring out CoCROI. )  What i've realized for my area ( Houston, TX) is basically anything over 130k basically produces 0 or negative CoCROI because ultimately your rent is the total income you get and subtract expenses(which usually adds up to around 700-800 bucks be conservative) and your mortgage(which would be around 500-600 bucks a month for a 100k-130k loan)

most of the homes near Houston average (base on craigslist, rentometer, realtor.com) 1300-1600 on rent for a traditional 3/2 SFH. Which means if i pay anything over 100k (assuming home's move-in ready, with everything function, even throw in a conservative 5000 cosmetic rehab cost) my CoCROI is already in the negatives..In my case my current goal is to move out of apartment renting so i can start owning some equity, so the ROI is not determining my buy, but I just want to know the general consensus on this matter. Is this the reason why people are saying there's almost no good deals right now because unless you can scoop up a home for pennies on the dollar as a fixxer-upper most likely, it's very hard for you get any sort of decent return? (CoCROI)

[Brian Alfaro]

Brian,

I’m a little confused by what you’re asking particularly because Cash on Cash Return and Return on Investment are not the same thing. 

You are almost certainly going to have negative COC the first year you own a rental property because it is your total net cash flow for year 1 divided by cash invested. If you bring $10k to closing or you refi and leave $10k in a rental after using hard money, you're not going to profit $10k your first year owning a property, so it's going to be negative. Don't focus on that. If you're a buy and hold investor the negative COC the first year is irrelevant for a SFH. Year 2 and Year 3 are where you make money.

There are PLENTY of rentals available in Houston that cash flow and plenty of “deals” if you know how to make them a deal - they don’t just fall in your lap usually. You just have to know what you’re looking for and have a strategy for acquiring them. I know people that have cash flowing rentals all over the city - sometimes they pay with all cash, sometimes they use hard money, sometimes they use private money, sometimes conventional. You can’t be a one trick pony trying to put 20% down every time in A class markets and wonder why they don’t cash flow. Yes, finding off-market deals that need a rehab (value add) is a good way to find cash flowing properties. You’ll have a higher chance of getting them below market value, rehabbing them to increase the value/bring it to market value, and enjoying some cash flow because you can now charge higher rents for a good quality product relative to what it’s appraised for. 

I think the sweet spot for rentals is anything below $200k in Houston with $130-$150k being the sweet spot (because your mortgage is 75-80% of that and you aim to rent between $1200-$1600). These properties fit the criteria for middle class folks who want an affordable place to live. They’re usually C/D class neighborhoods with blue collar, hard working folks. You can still cash flow on properties above $200k, but your rents are going to be for a more limited amount of people ($2k+ per month).