Cash on cash utility questions

[Luke Machen]

Hey all - I'm new to the RE investing game and have some (probably dumb) questions regarding cash on cash returns. As some background, I'm looking for turnkey or close to it and would be using a management company since I have a busy full time job. 

I was recently listening to a podcast and in this particular episode, the investor targeted CoC of >5%. Playing around with the deal analyzer on the website, it seems like this would be somewhat unheard of. In my market, median price for SFH is around 270K and median rent is ~1750K. Hypothetically, you'd need >2K rent on a 250K home to get more than 5% CoC (ballpark numbers with a few assumptions, mgmt fees, putting 30% down, etc), and it seems very unlikely this would exist where I'm looking.. Correspondingly I have a few questions

1. Are most of you including things like property insurance, etc in your CoC calculations?

2. If my goal is turnkey/buy and hold properties, should CoC really matter? Should I be prioritizing equity/appreciation?

3. I'm looking locally to start out (mid size city in North Carolina) - is the answer a different market?

Thanks in advance

-Luke

[Chris Seveney]

Quote from @Luke Machen:

Hey all - I'm new to the RE investing game and have some (probably dumb) questions regarding cash on cash returns. As some background, I'm looking for turnkey or close to it and would be using a management company since I have a busy full time job. 

I was recently listening to a podcast and in this particular episode, the investor targeted CoC of >5%. Playing around with the deal analyzer on the website, it seems like this would be somewhat unheard of. In my market, median price for SFH is around 270K and median rent is ~1750K. Hypothetically, you'd need >2K rent on a 250K home to get more than 5% CoC (ballpark numbers with a few assumptions, mgmt fees, putting 30% down, etc), and it seems very unlikely this would exist where I'm looking.. Correspondingly I have a few questions

1. Are most of you including things like property insurance, etc in your CoC calculations?

2. If my goal is turnkey/buy and hold properties, should CoC really matter? Should I be prioritizing equity/appreciation?

3. I'm looking locally to start out (mid size city in North Carolina) - is the answer a different market?

Thanks in advance

-Luke

The way I calculate cash on cash is It cost me X dollars out of my pocket to buy the property and after the first year I had Y dollars flowing back into my pocket. Divide the two and that is CoC return. In todays environment of back to historically normal interest rates and higher home values - now really is not a great time to buy. Back prior to covid, real estate investing was buying strategically and somehow adding value. That went away during covid when you could be in a coma stranded on a deserted island and done nothing to an asset and it appreciated. This gave many the false sense that real estate is simple but its not. As we get back to a more traditional market CoC may not matter for people.

For example for me, CoC does not matter as I buy in A/B areas and I hold long term so I am comfortable knowing even if I have zero a slightly negative CoC to start over the long term it will turn and I will end up with a nice return after many years.

Hope this helps

[Pat Lulewicz]

Luke - as an active investor and Realtor in mid-sized NC cities, getting 5% with today's home prices and interest rates is impressive in areas that aren't D or even C class assets/areas. Remember that comparison is the thief of joy - maybe they buy in very rough areas. Perhaps you don't want your strategy to resemble that.

1. Yes - include ALL expenses in your math, including reserves for repairs/maint, capex, turnover, etc. That includes property insurance and property taxes. Its extremely important when running tighter margins like what you're talking about to focus on age of HVAC, water heater, appliances, roof, etc. Any of those can range from $500 - $5,000+ and will blow your CoC out of the water.

2. CoC is an, all things being equal, comparison tool between properties. Cash flow is the metric that can move the needle. If you're only making $1k on a $100k investment, a 1% CoC is probably below what you could find in other investment strategies and your 1% is very high risk because 1 water heater gets you negative. Equity/appreciation (and tax benefits) are important, but you need enough cash flow to be able to stay in the game.

3. Recognize that going out of state will come with a lot of learning and education; there's a cost for that of your time and if its better served educating out of state or spending it on the property. Example - 10-20 hours this year managing your local rental vs 30 hours this year learning about other markets and finding third parties you can trust. Its a more comprehensive view especially early in your investing journey unless $ isn't a factor.

[Luke Machen]

guys - thanks a lot for the thoughtful replies. I appreciate it and it's very helpful