Whats a decent COC return in 2022?

Question

Hey team,

With home prices still rising, I'm finding it harder and harder to find a good deal and I'm curious if most investors are still getting good buy and hold deals (8%-12+%) or if lower COC returns is acceptable with other positive metrics.

To give some context, I just started wholesaling and in the past 3 weeks, I've talked to 3 owners that were accepting/ had offers on the table for 30k-50k higher than my MAO (70% rule w/ best case rehab budget). So, even the most motivated people are getting offers at a price that (in my opinion) can't make money.

Question for active investors: What is an acceptable COC for SF/small MF these days and why? Over the years, BP has highlighted a COC range from 7%-12+%.

I always assumed that I just wasn't finding motivated enough sellers, but after having this experience wholesaling and seeing on a recent BP video that Dave Meyer would be comfortable with a 4% COC return that had strong cash flow and strong annualized return, I'm thinking I might actually be missing something here.

Thanks for any input!

Allan Smith · Answer

There was a recent thread on this where everyone was saying crap CoC is okay to them because appreciation builds WAY more wealth. I still shoot for 20% plus if it's my money which pretty much means STRs and the rare BRRR are all in buying. Doing development now mostly.

Sam Yin · Answer

@Brandon Rush I still keep it around 8% CoC if possible. I wish I can find properties that generate 20% CoC, but I have not been able to. This I likely based on the combination of location, and asset type. I am toying with the idea to cross over into NNN commercial that can generate at least 8% for a more passive investment.

My most recent deal, April 2022, penciled out just under 6% initially ($34k), but was bumped up to 8% ($40k) by COE. I will raise rents to push it over 10% ($54k) in the next 60 days.

I self manage, so underwriting has another 10%+ built in for PM and gardening. However that is the trade off for the active part of investing in multifamily.

Appreciation and equity growth are factors in my calculations, but not major factors initially. They are bonuses that can accelerate growth through force appreciation and exchange in a few years. But ROI/cash flow will keep me afloat and allow me to live, therefore cash flow is important for the "NOW."

In my personal opinion, you can compromise slightly on the CoC with confirmed factors that would allow immediate increases (rental upside) and/or major upside in value.

For example, I closed on a deal in September 2021 at about 3% CoC. It was a deal with upside in rent and value. I served everyone with a 60day notice of rent increase on day one to bring the CoC up to par. I informed them to expect another 20% within a year. The rents were almost 50% below market in an A class building.

With that said, depending on the location and market trends, I may deviate to lower CoC in the future... but I would do what I can to stick with higher return rates.

Paul Moore · Answer

@Brandon Rush I like what Allan said because it demonstrates the mindset of a market that may have moved from investing to speculating.  Investing is when you can count on a predictable cash flow to drive your returns and value. Appreciation is a bonus.  A market has moved into a speculative mode when people are counting on appreciation to make a profit. Hope is not a good business strategy. I see why Allan is doing development if that’s the situation in the market. Another alternative is short term rentals, which often have higher profit margins and more work involved.  Good luck!

Sam Yin · Answer

That is correct. I can only speak for myself and the area I invest in. I have heard people go for deals with 20% or more, but at my current stage/phase of investing, I have not been able to find that. But I'm always looking.

There is an element of forced appreciation in the strategy as well as control through direct management. I plan to extract equity from the properties later this year.

For example, I buy at +-8% ROI in Jan. The goal is to increase ROI to +-10% by Dec and decrease operating cost. Based on actual raise/stabilization, I would evaluate an exchange or refi to extract the forced appreciation depending on CAP rate and prepay penalty.  The Cash flow keeps me afloat and buffers fluctuations. The forced equity allows me to build wealth.

one of my biggest limitations is my choice to invest in CA. I am open to the idea of out of state now that I have laid a comfortable foundation here. I'm biggest concern about out of state is the slow velocity.  But I'm not sure how true that is since I have never done it.

Dan Onofrio · Answer

@Sam Yin Thanks man. That was super helpful

Brandon Rush · Answer

Agreed! @Sam Yin. Thanks for the input. This is really helpful. If I'm hearing you right, the logic is that a slightly lower COC is OK at purchase, but you want to have a realistic path to get that rate of return up (around/over 8%) in the short term. Am I following correctly? Thanks again.

Brian Walters · Answer

From what I've seen a lot depends on the market.  Some investors I have spoken to are far more concerned with appreciation potential than cash flow or COC from the start.

Cole Simpson · Answer

I personally won't do a deal thats less than 20% unless I love the market

Brandon Rush · Answer

Appreciate the response @Allan Smith!

Whats a decent COC return in 2022?

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