How to calculate CoC return using HELOC for down payment

[Jared Miller]

A duplex I'm analyzing is for sale for $110k. Each side would rent for $660/mon so $1320 total. Mortgage would be $661/mon and this includes RE taxes and insurance. My down payment is from my HELOC and will need to start paying back right away. $300/month payment. I used $200/mon for cap x and vacancy (~15%). To figure my cash on cash return. Do I include my HELOC pmt in exp and my money invested is my HELOC amount? HELOC for down payment and closing costs comes to $30,815. or do I pretend the $30,815 is my cash and I don't have a monthly payment?

[JM Payne]

30,815 is your cash out, but the heloc payment on the backside goes into your expenses column right next to cap x, vacancy, repairs, and management.  So:

$1320 Gross - $661 mortgage - $300 Heloc Pmt - $264 Hold backs (5% ea/Vac,Mgmt,CapEx,Repairs) = $95

$95 * 12 = $1,140

$1140/$30,815 = 3.6% CoC Return

I hope that helps! You can mess with the numbers all you want (IE argue that vacancy won't occur or you're self managing,) but that's just trying to sweeten a bad deal. Even at 15% hold back, you're still only @ 6.2%. I would try to both negotiate a lower price AND look for value add through rent increase, if possible. YMMV...some will tell you that cashflow is cashflow, but you have to make that call for yourself. Obviously your CoC will jump up quite a bit at HELOC repayment.

I hope that helps!