Cash on Cash return for Single Family Home

[Thomas DeMoss]

What is the minimum cash on cash return I should look for in single family rentals? Here is a deal I just did and wanted some feedback on if it was a good investment. Bought 3/2 in good neighborhood. Sales price was $104000 put 26000 down and got 30 year loan for 4.50%. Should rent for $950-$975. PITI mortgage payments is $555. Love to hear your thoughts.

[J Scott]

Originally posted by Thomas DeMoss:

What is the minimum cash on cash return I should look for in single family rentals? Here is a deal I just did and wanted some feedback on if it was a good investment. Bought 3/2 in good neighborhood. Sales price was $104000 put 26000 down and got 30 year loan for 4.50%. Should rent for $950-$975. PITI mortgage payments is $555. Love to hear your thoughts.

A general rule of thumb we discuss around here is that on average, across a large number of properties and long periods of time, the total expenditures a property will consume (expenses, vacancy/rent-loss, capex, etc) is about 50% of gross rents. Could be 45%; could be 55%; but it's somewhere in that range. Do a search for "The 50% Rule" here to get more info...

So, if you're bringing in $950/month, over the long-run, you should expect 50% of that to go towards all your expenditures/costs, leaving you with about $475/month in net operating income, on average.

Subtracting your P&I will give you your average expected cash flow. You mention your PITI is $555 -- how much of that is P&I? Subtract that amount from $475, and that's your best guess (barring any *real* data) at your cash flow.

Of course, if you're managing the property yourself, you'll save about 10%, and your expense ratio will be closer to 40%, on average...but that doesn't account for your time spent managing, which I imagine you don't want to be free.