Cash on Cash return?

Question

Hey,

Big question, I am new to the real estate investing world and I am currently trying to collect as much knowledge as I can so when I start investing within the next couple years I will be more than ready. My question is what is a good percentage to look for in rental properties for cash on cash return?? And how exactly do you measure cash on cash return over a certain amount of years?

Thank you,

Elijah Crew

Joe Villeneuve · Answer

The desired percent return is based on the individual investor, and how fast you need to get your cash back...in all cases the faster the better.

CoCReturn is ONLY a measure of how much cash you get back within the first year.  Take all the cash (only) you get back in the first year ONLY, and divide by all the cash (only) you put into the deal in year 1.

Example1:  You buy a property for $100k, put 20% down ($20k), and get a cash flow in the first year of $4000, your CoCR would look like this:Cash out-->  $4000    = 20%Cash in-->  $20,000Example2:  You buy that same property for $100k, all cash ($100k), and get a cash flow in the first year of $8000, your CoCR would look like this:Cash out-->  $8000    = 8%Cash in-->  $100,000Example3:  You buy a property for $100k, put 20% down ($20k), added $10k out of pocket (cash) for rehab, and get a cash flow in the first year of $4000, your CoCR would look like this:Cash out-->  $4000    = 13.3%Cash in-->  $30,000

Bill B. · Answer

Cash on cash IMHO is a terrible metric for residential rental real estate. Almost any property buyer who bought outside of the Midwest can do a cash out refi within 5 years and take all their money out. So great, I tell you my cash on cash is infinite. Or at least 500 or 1000% per year. I guess that should be your target.

I guess you could uses COC to console 2 deals you’re considering. But even that can be misleading if one is a class d 1905 junker in the rust belt and the other is a 2018 class b property in the sunbelt.

Elijah Crew · Answer

Great Explanation! Thank you!

Rick Stein · Answer

Why wait a couple of years? I'd start now if I were you. Also, the less cash you have in a deal the better assuming you are not over leveraging  the deal. For example, if you were to buy a property for $100K and it needs $30K in rehab. Let's also assume an ARV of $200K If you could use private money and borrow the entire $30K, your LTV would be only 65%. Naturally you would have some closing costs on the purchase, but you could borrow that too. In that case, your Cash on cash return would be infinate as you would have NO cash in the deal. I closed three properties last week doing exactly that. Naturally the mortgages are recored, etc. The lenders are relatively safe as the LTV is low.

Cash on Cash return?

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