Is high cash on cash return with traditional financing possible?

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Is high cash on cash return with traditional financing possible?

John Matthews
Investor · San Diego, CA · Member since 2014 · 254 posts · 56 votes

I'm not sure if this is the right forum (I never can figure out which to post in!), but here goes:

Is it possible get great cash on cash returns using conventional (non-FHA, non-owner occupied) loans and your own money as the 20-25% downpayment?

As I can see it, the factors affecting the % return are the following:

  • Purchase price / rental income ratio
  • Decreasing the loan interest rate
  • Decreasing maintenance costs
  • Increasing leverage (potentially the biggest factor as I can see)

Is there anything that I am missing here to increase the cash on cash return? So let's look at a simple example:

  • Purchase price: $200,000
  • 25% Downpayment: $50,000
  • 2% Closing costs: $4,000
  • 4.5% 30 year fixed rate mortgage: P&I = $760 / mo

Let's assume gross rental income is $3,000/mo (1.5% might be reasonable in Philly?). Using the following rough approximations:

  • 50% rule: $1,500/mo
  • NOI: $3000-$1500-$760 = $740

Yielding a cash on cash return of 16.44% (NOI Annually / Cash down or 740*12/54000). That's not terrible, it's certainly greater than the stock market on average, but it would be great to be over 20%, right? Or is that unrealistic?

Are there some creative ways of bumping that number up, while still using traditional financing that I'm missing out on? Or am I relegated to creative financing if I want to sweeten my cash on cash return? Any comments are appreciated!

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Nathan Emmert
Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
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Roll your closing costs into the loan and you'll bump up that CoC return another 2% or so.

Honestly, these are the types of deals I tend to look for.  Solid returns and pretty easy to find.

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
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    You can, if you limit the use of your own cash input.  Once your start talking about using 20-25% of your own funds for a down payment, it makes it harder...if not impossible in some markets.

    1Reply
  • Nathan Emmert
    Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
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    Roll your closing costs into the loan and you'll bump up that CoC return another 2% or so.

    Honestly, these are the types of deals I tend to look for.  Solid returns and pretty easy to find.

    2Reply
  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
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    See this post that I just started:

    https://www.biggerpockets.com/forums/48/topics/166...

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  • John Matthews
    OP
    Investor · San Diego, CA · Member since 2014 · 254 posts · 56 votes
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    Thanks all for the responses.

    @Nathan 

    @Nathan Emmert good point. A lender I was speaking with today actually brought up that point. Because I'm a nerd, it's worth nothing that assuming we're talking about the seller financing the last portion, and raising the purchase price to match - it actually looks like rolling the closing costs into the loan makes a difference (in this scenario of a 25% downpayment) of closer to 0.8%. Though, when you get to a 20% downpayment you're up to 1.3%, 15%, you're up to 2.2%, etc. The graph is exponential similar to the CoC gain chart that @J Scott posted in his post below yours. This is also highly dependent on the closing cost %.

    @J Scott Thanks for that link, it's so timely that you just posted that. Do you happen to have the excel file used to create that chart? I'm a big data guy and I'd love to play with numbers a bit.

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  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
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    Originally posted by @John Matthews:

    @J Scott Thanks for that link, it's so timely that you just posted that. Do you happen to have the excel file used to create that chart? I'm a big data guy and I'd love to play with numbers a bit.

     Unfortunately, I don't.  I just created it on the fly...shouldn't be too hard to recreate if you start with my rental analysis spreadsheet (should be in the Fileplace)...

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  • Nancy L.
    Philadelphia, PA · Member since 2014 · 178 posts · 64 votes
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    @Nathan Emmert Does rolling closing costs into a loan mean getting a sellers assist? Or something else? (I'm assuming the context is getting a mortgage on new property, not a cash out refi.)

    @J Scott there's a Fileplace?? With spreadsheets?!? I'm new here, where could I find that?

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  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
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    Originally posted by @Nancy Larcom:

    @J Scott there's a Fileplace?? With spreadsheets?!? I'm new here, where could I find that?

    https://www.biggerpockets.com/files

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  • Nathan Emmert
    Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
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    @Nancy L. 

    All sellers carry about is the "net" generally... rolling closing costs in will stress the appraisal some, but such is life.

    Essentially if I know my closing costs are $5,000... and I know the seller needs $200,000 to accept my bid... I can bid $205,000 with seller to pay $5,000.  As long as the appraisal comes in at $205,000 or higher, it's transparent to the seller (they net $200,000).

    The difference to you is instead of paying 25% of $200,000 ($50,000) plus $5,000 in closing costs $55,000 total... you pay 25% of $205,000 or $51,250 saving yourself $3,750 in cash.

    On higher priced properties it's not such a big deal... but on properties in the $60 - $80k range where you're closing costs are upwards of 25% or more of your down payment it can swing things.

    2Reply
  • Kevin Nichols
    Investor · Rock Hill, SC · Member since 2014 · 122 posts · 33 votes
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    @John Matthews We just closed on a duplex in SC with a great COC with a conventional 15 year mortgage (3.875%)

    Sale price:  $53K
    Downpayment:  $13,250 (25%)

    Income:  $12,240 ($1020/month (total...both sides))
    Expenses:  
    Taxes $1020
    Insurance $480
    Repairs $1200
    CapX $1100
    Vacancy $979
    Debt Service $3499
    No PM

    Cash flow $3928/year (29%)

    They can be had....but it took me months to find this one and I haven't found any others in the small geographic area just south of Charlotte, NC where we focus.

    1Reply
  • Nancy L.
    Philadelphia, PA · Member since 2014 · 178 posts · 64 votes
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    @Nathan Emmert Got it, thanks! I was wondering about the mechanism, in my state at least this would be listed as a "seller assist" on the agreement of sale. Never really thought of this as a way to finance an extra cost, so thanks for that tip!

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  • John Matthews
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    Investor · San Diego, CA · Member since 2014 · 254 posts · 56 votes
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    @Kevin Nichols Thanks. So you're looking at 2% properties. My concern is, staying out of D or even C neighborhoods, I don't know that I can find 2% properties in my area. Though, that's a question I still haven't been able to find an answer to. I'm fine with being patient to find one, but if they don't exist, I need to change my strategy.

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  • Steeve Breton
    Investor · Natick, MA · Member since 2013 · 108 posts · 69 votes
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    A lot depends on what you really want out of your investments based on where you are in your life and possibly depending on your financial plans (early retirement, etc). In my mid 40s with a fair amount of $ in the stock market I started to take my stock profits and invest in 3 family properties around Boston. I stick to B neighborhoods. Putting down 20% ($75-80k) and getting low teens for CoC. That's with streight up 30yr fixed and my int rate is a bit higher because I hold the properties in an LLC. That return is solid for me. Plus:

    1. It's much safer than the stock market as long as you get educated and do good diligence on your market and properties. 

    2. On a $300k property the loan amortization is substantial, as is appreciation (even at 2% inflation)

    3. I use the passive losses (depreciation) to offset some of my passive income (i'm a passive partial owner of a small business)

    So, for me low teens CoC is great. The fact that I can do it in my back yard is also important to me.

    Cheers, Steeve

    2Reply
  • Nancy L.
    Philadelphia, PA · Member since 2014 · 178 posts · 64 votes
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    @J Scott  thanks so much! I grabbed your Rehab Analysis spreadsheet -- very helpful, and I love the formatting!

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  • Nancy L.
    Philadelphia, PA · Member since 2014 · 178 posts · 64 votes
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    @John Matthews I'm in philly and have some rentals... I am getting 2.2% on a duplex in E. Mt. Airy if you look at purchase price alone, but I had to put some $$ into rehab to get the rents to where they are, bringing my % down to more like 1.5. However one of the units has a long term tenant inherited from the old owner at a below market rent, and I have not raised rents on him much. Also, this was my first rehab and I have no doubt that someone more experienced could have done the same for less. So I think someone else may have been able to get 2% or at least closer, but shoulda woulda coulda is not a good accounting method... And without a way to finance the rehab costs, rehabs change the LTV ratio.

    My observation has been that more units in a multi-family typically gives a higher %, but then you also have higher costs in lawn care, snow removal, trash removal, etc. 

    I do think 16% is both a reasonable expectation and a reasonable return (depending, as stated above, on your priorities). But if I'm correct that a higher % may often be coupled with some higher costs or expenses, I think looking at ROI's on some specific examples would be the best way to answer this question because this would avoid confounding factors and make sure you're comparing apples to apples.

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  • Nancy L.
    Philadelphia, PA · Member since 2014 · 178 posts · 64 votes
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    *2.2% etc. referring to percentage of purchase price as rental income

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  • Andrew SyriosPro Member
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    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
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    Don't forget vacancy in your calculations. But generally speaking, the cash flow for a single family house isn't going to be through the roof (there are exceptions of course). 

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
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    Originally posted by @Andrew Syrios:

    ........ But generally speaking, the cash flow for a single family house isn't going to be through the roof (there are exceptions of course). 

     That, depends on your market.

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  • Andrew SyriosPro Member
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    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
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    Originally posted by @Joe Villeneuve:
    Originally posted by @Andrew Syrios:

    ........ But generally speaking, the cash flow for a single family house isn't going to be through the roof (there are exceptions of course). 

     That, depends on your market.

     It also depends on what "high cash on cash return" means. It's a pretty subjective term.

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
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    Originally posted by @Andrew Syrios:
    Originally posted by @Joe Villeneuve:
    Originally posted by @Andrew Syrios:

    ........ But generally speaking, the cash flow for a single family house isn't going to be through the roof (there are exceptions of course). 

     That, depends on your market.

     It also depends on what "high cash on cash return" means. It's a pretty subjective term.

     True.  What would you consider 500/month?

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  • John Matthews
    OP
    Investor · San Diego, CA · Member since 2014 · 254 posts · 56 votes
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    @Nancy L. I'd be really curious to see your numbers, if you're open to sharing. That's exactly what I'm looking for.

    @Andrew Syrios @Joe Villeneuve For me I'm looking for more than 20% - Indeed, 16% is better than the stock market on average, but in order to justify the additional TIME investment, I'd like more like 20% (as a starting point). Especially since I can't claim most of the additional tax benefits, as this will be my first rental property (ie. passive income source) and due to my situation, my tax bracket is pretty low (soon to be wife is still in school = no income)

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  • Steeve Breton
    Investor · Natick, MA · Member since 2013 · 108 posts · 69 votes
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    @John Matthews In my examples above the CoC is around 12% but the total returns are in the 25% range once you factor in amortization and 1.5 to 2% appreciation. Not that you should count on the latter. That said, I understand where you're coming from. CoC is the only thing that matters when you're trying to replace your income with rental properties. You might consider flipping or wholesaling to generate some income while you build your portfolio.

    PS.  @Nancy L. West of Boston properties generally retail at just under 1% Rent-To-Value.  I won't buy unless I can improve it to a little over 1% RTV.  Not to get into it on this post but RTVs for higher value properties tend to be lower... but then many of your expenses are also a lower % of your rental income.

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  • John Matthews
    OP
    Investor · San Diego, CA · Member since 2014 · 254 posts · 56 votes
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    @Steeve Breton Right. I'd love to factor that stuff in, but this will be my first rental (and first passive income source) so unfortunately I can't deduct too much of my taxes (yet!). Right now CoC matters most to me as well since I'm young, I figure cashflow will essentially increase the compounding affect, and get me to where I want to be faster.

    I'm glad I moved then! I used to live outside boston (sharon, MA), but moved to Philly for school then work, though I do miss Boston a bit...

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