Calculating Cash on Cash Renturn for Wholesale Deals?

Question

Hello everyone my name is John and I’d like to get into wholesaling. I’ve been doing a lot of research and spoke to a couple of buy and hold investors in my area. One of them mentioned that he typically looks for a 15% Cash on Cash return. My question is, how would I calculate the CoC return wholesaling a duplex? Properties are typically bought cash so the amount of money the investor is putting down (plus repairs) is higher than someone who is financing, so the CoC would be a lot lower. How would I calculate that 15% CoC return? Also, would I use the current numbers the house is renting for or what it would be generating all fixed up? Any advice is greatly appreciated!

John Gusto · Answer

@Ken R. this was all so helpful. Exactly what I was looking for. Thank you again!

Ken R. · Answer

I just noticed that my numbers were off. I meant to assume that your cash buyer was all in at $80k (not $70k) and the bank financed him at $75k (75% LTV)

In that case he would only be out of pocket $5,000.

Sorry about that.

In my earlier analysis he cash on cash would’ve actually been infinite because he eventually had no money out pocket! Lol

Ken R. · Answer

Hey John, you’re welcome! Glad I could help. Yes, the taxes and insurance were already included in the 40%. That should usually cover everything, give or take a few bucks.

John Gusto · Answer

@Ken R. Thank you for such a throughout break down! I was able to work your example using some of my own numbers and was able to follow each step. I do have a couple of questions though:

-Should the debt service expense include taxes and insurance? Or is that included in the the 40% expenses?

For my expenses I included water, electrical (for common areas), property management, capital expenditures, vacancy rate and maintenance.

Thanks again for the detailed explanation!

Ken R. · Answer

@John Gusto

I’ll try and give the quick answer first but then I’ll break it down a bit more detailed. Hope this helps!

Quick and dirty math formula:

Annual Cash Flow divided by 15%= All in costs. In other words this formula will tell you his maximum all in costs he would need to be at to reach his minimum ROI or Cash on cash return.

More details.

It can be a bit confusing but here is a deeper break down.

The COC return would ultimately depend on his financing terms. Such as...

Interest rate, Loan to value (LTV), also the time frame such as 15yr,20yr,or 30yr am, etc.

So without those exact numbers it would all be speculation.

However here is a common scenario that would give you an better idea.

For example:

Lets assume....

ARV: $100k

Purchase Price: $60k

Repairs: $5k

Assignment Fee: $3k

Misc costs: $2k

All in costs: $70k

Now lets assume property rents for $1,000 a month and after expenses he’s left with $600. Lets now also assume he has financing in place at theses terms:

75% LTV ($75k)

Meaning the bank gives him $75k cash

This assumption now only leaves his total out of pocket costs at $5k

Now lets assume his annual net operating income (after all expenses and financing) is cash flowing about $1800 a year

If you divide his NOI ($1800) by his all in costs ($5k)  you will get a Cash on cash return of 36%. (That’s more than the 15% minimum he needed but you get the picture.)

This financing example also assumes:

30yr Fixed,

6% interest,

Rent: $1,000 a month ($12,000yr)

Operating Expenses: $7,200yr (40%)

By using a mortgage calculator you can input this info and it will calculate the monthly payment. You should get a P&I payment of around $450 month or $5400 Annual debt service expense.

Final Breakdown:

Gross Annual Income: $12,000

Net Operating Income: $7,200 (-40%)

Debt Service expenses:$5,400

Annual cash flow: $1,800

Cash on cash return: 36%

I know that’s a lot. Hope it helps or Maybe someone else can explain it easier lol.

Best wishes on your REI journey!