CoC Calculation with LOC money

[Bennett Albertson]

If I were to use a security backed LOC to purchase a $75K property. Let's say I can get the LOC at 5% interest rate. Include $5K for closing costs and minor repairs. Annual cash flow is $2,940. What would the CoC return be?

Is this the correct calculation?

$2,940/($0 down + $5K costs) = 59% CoC ROI

How am I supposed to correctly evaluate this financing option?

Thanks!

[Sam Lewis]

I typically calculate CoC based on the return after exactly 1 year from the purchase. An example using a HELOC at 5% interest with simple numbers:

Purchase price (60K) + repairs of property (15K) = 75K all using HELOC @ 5%. Additional out of pocket fees at 5K using cash. So all-in 80K, new value of property 6 months later is 100K. Cash out refi @ 80% LTV on 100K = 80K, pay off HELOC + 5K back in pocket with 20K tied in equity in property.

In this perfect example, we pay off our principal withdrawal on the HELOC and the original 5K miscellaneous costs upfront. So the only expense we haven't accounted for is the interest paid on 75K over 6 months - roughly 2K. So after refinancing 6 months later, we get our money back, and again, we spent 2K on interest for the 75K @ 5% interest.

For CoC, what did we make 1 year post-purchase? So we will refinance by month 6, and rent for 6 months (however many BRRRRs allow you to rent by month 4). We will still stick with 6 months for simplicity. Assuming we rented out this unit @ $1000/mo (1% rule), and pocketed $500 (50% rule), we made 6 * $500 = $3000.

CoC return = $3000 (net profits after 1 yr) /$2000 (net expenses after 1 yr) = 150%

What's pretty cool is if the deal is really good, and we end up refinancing and getting all of our money back and more, our CoC return becomes infinite!

Hoping this helps...