Cash on Cash ROI...reality check

Buying & Selling Real Estate

Cash on Cash ROI...reality check

Investor · Indianapolis, IN · Member since 2016 · 221 posts · 134 votes

Hello everyone,

I'm new to this and working on acquiring my first deal along with my husband @Jose Soto. We are looking for properties in the Huntsville, Al area. We have primarily been looking at SFR. We have been using the rental property calculator and have been trying to make offers that get our Cash on Cash ROI to 11%. The hard thing about this is that many of the properties we are looking at are below 100k. For example, one I am looking at is listed at 87k. In order to make the numbers work for 11% I would need to offer 53k. It just seems highly unlikely to me that anyone is going to want to accept such a low offer. I even feel bad asking realtors to make these offers...like they are going to think I am wasting their time (except @Christy Harris, she has been amazing and hasn't laughed at us one...at least not to our faces!) Anyways, I was curious to hear from the community, specifically people who have SFR's....what is the typical cash on cash returns that you get for your properties? Do you have any with lower cash on cash ROI's that you are still happy with?

Any words of wisdom for this newbie who is eager to buy but also wants a good deal?

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Investor · Coeur d'Alene, ID · Member since 2016 · 551 posts · 218 votes

10y

I don't ever feel bad for making a low offer, especially if your numbers back it up. The worst that happens is you don't hear anything back. If a home has been on the market for an extended period sellers could get motiviated to sell and are just waiting for the next offer to come in.

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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @Brent Coombs:

Say what now? YOU, using the PTR metric? What's up with that? (You tried to shout Ali down for suggesting the usefulness the same thing)!
Anyway, no, it didn't go over my head. It's just that I used the term cap rate instead of PTR. So, let me re-phrase my earlier post:-
You wrote: "Each $100,000 in appreciation provides me $700 MORE rent".
Interesting, that you already decided your PTR will stay the same over time!
1. Brent I don't use PTR ratio, It is useless except to try to trick people into buying crappy properties.
2. Shouting? Notice Ali has not answered my question.
3. See your problem is still using terms incorrectly, Now you are saying cap rate and PTR are the same?! Please explain.
4. I calculated the PTR ratio on all my properties over 40 years when I first heard it here. AND over that time it has stayed pretty consistent at .7%. Still a useless number that even you have not shown a good use for.
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Jared Saunders
Investor · Marion, IN · Member since 2015 · 21 posts · 65 votes
10y
I think it's acceptable to have an offer for almost any property! You can just keep running the numbers until you get a purchase price that gives you a good return.
I personally believe that in markets that have a 1% or less SFR price to value, it's better to go multi family. Most low/medium priced multi families have amazing cash on cash ROI. Could possibly be much more than your goal of 11%
30% is possible with the right multi family Property.
I hope this helps some and everything works out for both of you!
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Brent Coombs
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
10y
Originally posted by @Account Closed:

Originally posted by @Brent Coombs:
Say what now? YOU, using the PTR metric? What's up with that? (You tried to shout Ali down for suggesting the usefulness the same thing)!
Anyway, no, it didn't go over my head. It's just that I used the term cap rate instead of PTR. So, let me re-phrase my earlier post:-
You wrote: "Each $100,000 in appreciation provides me $700 MORE rent".
Interesting, that you already decided your PTR will stay the same over time!
1. Brent I don't use PTR ratio, It is useless except to try to trick people into buying crappy properties.
2. Shouting? Notice Ali has not answered my question.
3. See your problem is still using terms incorrectly, Now you are saying cap rate and PTR are the same?! Please explain.
4. I calculated the PTR ratio on all my properties over 40 years when I first heard it here. AND over that time it has stayed pretty consistent at .7%. Still a useless number that even you have not shown a good use for.
I didn't say cap rate is the same as saying PTR. My point was: WHICHEVER metric you use, (PTR = Price / GROSS rent; Cap Rate = Price / NET rent), you have already decided that your past results will not fail you in the future - which I found "interesting".
Ali's point might well be: what if she can show her clients that her available investments have consistently shown a .8%/m net return or better over the last 40 years (rather than .7%)? Her clients can keep buying more of them, using the positive cash flow they get from day 1.
It really needn't be: you versus them/us. I'm sure there are mid-west ($30k "pig") investors who can equal you in cash flow and property value accumulation - they just get there using different tactics!
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Matt R.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
10y
Originally posted by @Richard Dunlop:

Originally posted by @Account Closed:
Originally posted by @Ali Boone:
@Account Closed
@Brent Coombs
@Ali Boone, I invest for profit. Only a fool or someone trying to fool someone would use a Price-to-Rent ratio as a viable metric for real estate investing. Think about it. Why would the market ONLY be willing to pay $100,000 for a possibility to collect $2,000 rent when in a profitable market they would pay $286,000? What is your answer?
@Bob Bowling the people you are scolding are not 1 issue investors, I speculate that they typically invest using several metrics.
I invest in Detroit BECAUSE of the appreciation the Cash Flow is great also. I expect BOTH to be better than anywhere for the foreseeable future.
The question I would ask (Just ONE of many) "Is why would ANYBODY invest in a market where the average weekly wage is lower than Detroit.
Wayne is the County Detroit is in.
Is this the only metric I should use?
Of course not! Taking everything together I'm glad I relocated to Detroit. FROM one of your favorite markets California.
I think what happens in LA is there is low supply high demand. So even though the vast majority do not make enough to afford to buy and or barely rent the sheer numbers of those who are left and that are still qualified compete for the low inventory. If we add 400 000 residents and they never built housing to accommodate just a very small percentage is needed to gobble up what is available to rent or buy. This wage metric gets overcome by that. I have no scientific evidence for this but I have run this theory by long time researchers and forecasters and they all agreed this is likely the exact case.
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Matt R.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
10y
To further support this theory when we look at the top 10 cities nationally for the more recent rent increases, 5 or 6 are in Cali. LA I think is #3 for the entire nation in rent increases. Yet it almost always ranks 1 or 2 in being the least affordable to rent or buy when median wages are measured.
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Omar Merced
Real Estate Investor · Las Vegas, NV · Member since 2016 · 399 posts · 260 votes
10y
Hi Samantha. You see what you started here? Great post. Love it.
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @Richard Dunlop:

Originally posted by @Account Closed:

Originally posted by @Richard Dunlop:
Originally posted by @Account Closed:

Originally posted by @Ali Boone:

@Account Closed
@Brent Coombs
@Bob Bowling the people you are scolding are not 1 issue investors, I speculate that they typically invest using several metrics.
I invest in Detroit BECAUSE of the appreciation the Cash Flow is great also. I expect BOTH to be better than anywhere for the foreseeable future.
The question I would ask (Just ONE of many) "Is why would ANYBODY invest in a market where the average weekly wage is lower than Detroit.
Wayne is the County Detroit is in.
Is this the only metric I should use?
Of course not! Taking everything together I'm glad I relocated to Detroit. FROM one of your favorite markets California.
Actually I believe you are wrong. Here is what @Ali Boone stated, " It's all about the price-to-rent ratio." Then she goes on to express that she thinks this identifies cash flow which seems to be her and Brents focus for investment. I'm just pointing out that The metrics they are using are not measuring what they think. Do you notice how neither have stepped up to explain their thinking?
I'm trying to educate not scold.
As far as your question I can say that the market does not consist of those making the average weekly wage. Hawaii is an international market made up of high net worth and high wage earners. That is reflected in the prices and the supply and demand. Those are metrics that favor a profitable market.
I know your market got the Japanese boost as you have pointed out previously and I do believe you are experiencing and will continue to get a Chinese boost (as is much of the West Coast) but then you and I would disagree from there.
I believe your market has to out price paying tenants at some point while you seem to imply that the "irrational exuberance "can continue indefinitely.
http://m.hawaiinewsnow.com/hawaiinewsnow/index.htm
Richard, people been bitchin bout increasing rents since I moved here in 1977. Well, not the landlords.
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