What's a Good Cash-on-Cash Return?

Question

I know many investors are glad to get an 8% CoC return on their properties because it's still better than most other investments and it's a whole lot better than anything you can get from a bank or savings account.

However, even if you're investing for the long term, isn't it better to get a higher CoC return so that you can double your investments much faster? What is your minimum CoC return you expect when you invest in real estate? Obviously it can vary across property class where Class A properties have lower returns compared to Class B, and B will have lower returns that Class C.

If you're investing in SFH in Class C neighborhoods, what CoC do you expect before you consider it a good or great deal?

What sort of CoC are you getting on your current investments?

Hope to hear everyone's thoughts. Thanks.

Matthew Irish-Jones · Answer

@Brian Hosier

In WNY

15% + for a high risk C class area

8-10% for B class

5% and below for A class

Corey M. · Answer

Why are you concerned with CoC, in particular? I'd worry more about ROI, which incorporates mortgage paydown from the renters AND appreciation. And if you want to take it a step further, you should take depreciation into account. You could have a house with 3% CoC that's getting a 20% ROI. And ultimately, if you're going to make a comparison between other investments, like the stock market, ROI is the actual return you make on your investments. CoC and cap rate have always been arbitrary rates in my opinion.

Jonathan R McLaughlin · Answer

@Brian Hosier you really cant answer this question at all usefully without knowing a few things:

Return and risk are always related. what is the level of risk you are incurring? A 5% return is awful if it has a 50% chance of losing money, but its out of this world fantastic if there is a 1% risk. In case you are wondering I'm just pulling these #s out of my back pocket

What is the cost of your money?

What are the alternatives easily available to you?

What is the OVERALL return including loan pay-down, either positive or negative appreciation and length of hold? The longer you hold the more paydown and market directions becomes a factor, so COC can be a misleading metric which can be dwarfed by appreciation or lack thereof. I see a lot of people happy with a current COC when it seems to me they are actually losing money (cough* cough*...turnkey...cough* cough*) since their exit is likely to be an expensive one.

For a B range smaller property with some value add or repositioning potential and a few exit options (i.e selling as is to owner occupant, condoing, selling to investor, hold) I get interested at around 10% COC and 15-20% IRR with a "not too much risk" property. This has given us a reasonable growth rate (2-3 properties a year) which suits us nicely.

For larger NNN commercial about 7-8% cap rate on a stable long term lease works with our cost of capital and debt financing. You see a lot of offerings at 5-6% which are probably appealing to cash buyers but not us. Its the spread between the debt and the income where we make our money.

John Morgan · Answer

@Brian Hosier

15% coc is what I aim for. But if it’s in an upcoming area, then I’m ok with only 5-10%. I don’t invest for cash flow now. I’m looking 5-10 years down the road. All my loans are 15 years so I’m not killing it with cash flow. But mortgage pay down and appreciation is the icing on the cake.

Lesley Resnick · Answer

The problem is all deals are not fungable as a result, It is difficult to accurately mathmatically compare 2 deals before you buy them.  Should you buy the quad that needs a reno and will require hard money or the well maintained house grandma live in using a fannie mae conventional loan?    I am not a fan of COC.  It is a number that can easlity be manipulated.  What is the COC on a property I pay cash (very low) vs 100% finance?  Past the year one COC falls apart.  As you collect rent the COC continues to climb.

I like the gross rent multiplier and NOI.  I also take a subjective look at the deal.  Neighborod, finance opetions, renovation timeline.

Carl Fischer · Answer

@Brian Hosier

I won’t do a deal unless it nets 15% minimum COC. I include NOI, any tax benefits saved, and any principle paid down on the mortgage-as profit centers. I do not count appreciation until it is captured and would add it in only at the sale.

ROI changes based on many factors, is the property bought in a tax advantaged plan such as an ira or 401k where you don’t get depreciation to offset income unless your ira/401k has debt. But you don’t pay any taxes either. Your income level can also postpone any annual losses.

Interest rates and age of loan which affects the percentage of principle and interest being paid also changes ROI a little.

I utilize different types of properties-commercial and residential, office, SFHs, multi family, industrial, and have properties in multiple states for diversity. ROI changes some over time and economic conditions. It is harder to be spread out without a large base in each geographical area because you don’t get the economy of scale in pricing of labor or materials. 30 properties in one area gives you a lot more clout than one with trades people. I also use the lowest rent in the area because I want the best tenant. Bad tenants can be very costly and blowup your model and your return.

Gary Parilis · Answer

Related to @John Morgan's point... It partly depends on your financing options and choices. For example, I'm investing thru a SDIRA, which has some massive benefits, but limits my financing options (why is a topic for another post). I'm under contract on a property that will yield about 11% CoC ROI (35% down, 5.75% interest, 25 years). If I were able to finance with 25% down, 3.5% interest, 30 years, my CoC ROI would be >16%. I'm happy with what I'm getting because of the ability to use the funds I've piled into my 401k over the years, tax deferred. [Yes, I know UBTI applies; also a topic for another post.]

Jonathan R McLaughlin · Answer

@Brian Hosier Hey Brian, thanks for the comment. It sounds like a good and profitable arrangement, bravo. But its certainly not risk free. By risk I mean the whole spectrum of possibilities for losing money, from micro to macro. So, you could have a fire in your building, management company could go bankrupt or be corrupt, could change hands and be less responsive, market could have a significant downturn due to job loss or other reason, hyperinflation could make your asset next to worthless or you cash strapped, zoning could change, things around you could be built that lower your value yada yada. Some of these you can mitigate by due diligence, some by diversification and some you just have to live with.

The typical pricing for lowest possible risk is treasury bonds ("backed by full faith and credit" ahem...). I'd say investing in a syndicate or similar offering with a third party manager is reasonably high risk by definition, hence the high return. That's not implying you have a risky investment, just that the asset class is higher risk and requires much more due diligence and good investor fundamentals.

Brian Hosier · Answer

Hi @Jonathan R McLaughlin, my current passive rental investments are zero-risk because I have a contract with the property management company and they cover all vacancies, turnovers, maintenance, etc., while providing me a 15+% return. They're a bit unique because it's not a typical "turn-key" where the owner still has a lot of additional charges.

Jonathan R McLaughlin · Answer

@Brian Hosier zero risk and 15% return is unicorn territory...at least at the macro level. Great thing about real estate though is you can find a particular thing and analyze risk better than anyone looking from afar...still, I'd love to hear how you define risk!

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