what's your cash-on-cash return

[Chris Jones]

Hello everyone, i just wanted to ask some of you experienced CRE investors a question.

1. what kinda cash-on-cash returns do you look for?
2. are you finding it hard to find deals with your cash-on-cash
requirements?
3. is there ever a time when you'll go through with a deal, even
when you can't get the cash-on-cash returns you want? if so,
please explain

the reason for my questions is because i'm finding it almost impossible for find deals offering the kinda cash-on-cash returns i'm seeking (20%).

So i just wanted to know is this something i'm doing correctly and i just have to keep searching for that right deal, or is this percentage completely out line (to high) and i need to come down a little to reasonably figure.

[Jon Holdman]

I think this is a more complex question than you're making it. If you can buy a house with very little money out of pocket, you can get a huge ROI and still make almost nothing. If you underestimate your expenses, you're ROI will look very large. If you do a realistic deal with realistic expenses, your ROI may look less, but it will actually amount to something and you may actually get it.

Consider a house you can buy for $100K and that rents for $1600. Assume expenses of 50%, leaving you NOI of $800. If you pay only closing costs and get a 100% loan, your payment is $665 and your cash flow is $135. ROI is 54%. Woo hoo. That would be a good deal in anyone's book, and some here would say I've very pessimistic on the expenses and its a great deal. Even I would tend to be a little more optimistic than that.

Now, consider if you're just buying this straight up with a 20% down payment. Now your total cash investment with closing costs is $22,800. Cash flow is now $268 a month. But ROI is only 14%. Is this suddenly a much worse deal?

A way to look at this is to separate the return generated by the property from the return generated by your cash. In the first calculation, your cash investment is $2,800 and that produces $135. You could consider the net $20K produces $133. Guess what? That's the return on a 30 year, 7% note for $20K.

Take it to the extreme and put 100% down. Your ROI is 9.4%. In commercial properties, that's the "cap rate". If you can borrow money at 7%, and generate a 9.4% return you're making that spread. Plus appreciation, assuming you get some over your holding period.

My point is that when you look at cash on cash return you're mixing together the deal and the financing on the deal. Ultimately, those will be mixed because we all have to deal with both. But, the financing has a huge effect on the ROI. Better to evaluate a deal on its own, then arrange your financing situation to optimize your ROI.