Are you accepting less CoC Return due to interest rates?

Question

Are you accepting a lower CoC return than you historically have due to interest rate hikes? I am finding it almost impossible to find a 30% return (the gold standard for STR's) due to interest rates being this high. Are folks accepting less of a return, ie. 15 - 20%, now that rates are this high? Thanks.

John Underwood · Answer

I'm not calculating returns. I just buy stuff I like. For LTR'S I am paying cash and don't need a calculator to know I'm getting better than a $100 return or better.

Collin Hays · Answer

I agree. I look at STRs as a long term wealth builder. Something I hope to pass on to my kids, and hopefully their kids. Long term, they are still the best investment I have discovered, whereby I can also sleep soundly at night.

Ryan Moyer · Answer

Of course. And not just rates, as STR has become more and more of a stable, accepted form of investment, CoC return has and will continue to lower.This is true of any investment niche. When it first comes about and many people still avoid it because it's considered risky the returns are at their highest. As it becomes more and more accepted and more and more people jump in the returns lower over time.Same path long term rentals went down. Every year the returns on LTR get smaller and smaller, and what people thought was "too little" 10 years ago is now considered an amazing unicorn find.STR will be no different. As more and more people jump in, the returns will lower.

John Carbone · Answer

15-20 percent makes sense. I personally wouldn’t go lower than that. You are better off waiting for prices to drop if you can’t come close to 20 percent. There is a case to be made where you pay a PM and 100 percent passive and as long as expenses are covered, then you will have a nice asset paid off by others. I wouldn’t bother self managing though for 15-20 percent, it’s just not worth the headache unless your day job is under 6 figures. A lot of people on here bought years ago, and as a result they have massive equity in their properties. As rates are putting downward pressure on values, I don’t foresee a lot of equity until rates drop, and if they don’t we could be in a lost decade for real estate values. I think new purchases now need to have some sort of cash flow instead of relying on equity. Alternatively you can make 10 percent on AAA corporate debt or good paying dividend stocks.

Mike Dymski · Answer

15-20% for a very active strategy would not be worth it in my opinion. I'd rather invest passively with others and get 10-15% (or in index funds).

Dom Radcliffe · Answer

Yes! COC is temporary and does not take the whole picture into account. There are other factors in this multidimensional investment category - Equity and Appreciation. Also, there's depreciation. There are so many advantages when you factor it all in. If your day to day living expenses depend on COC of greater than 20-25%, then sure - do not buy low COC properties. If you are thinking like an investor, have cash reserves or other job to cushion back to, definitely consider lower COC (I feel comfortable with 10-15%) if the market is growing. Few years down the road, your monthly payments (mainly mortgage and interest) will be the same, while your COC will be higher because rental prices will have increased.

John Underwood · Answer

Sorry I meant 100% return on many deals.

Collin Hays · Answer

I bought a fresh 1K shares of MO, sporting a dividend of slightly more than 8%. Steady to increasing dividend for over 200 quarters, 52 years. I’ll take it.

Dom Radcliffe · Answer

30% COC IMO is not the "gold standard" of STRs. It is a blip in the timeline radar of STRs. Anyone selling the idea of 30% COC to be achievable by a first time newbie investor starting from first year should look in the mirror long and hard, because this might only happen rarely.

Nate Sanow · Answer

Returns are going to be “down” if only buying at retail, full premium market prices in conjunction with paying full premium rates. I’d recommend not paying full retail price for ANYTHING right now, and only pay for assets that are on sale. That is the trade off on the higher rate situation we are all in, being that sellers will take a second look at the offers that don’t tickle their fancy. Returns can be increased with greater risk. The marketplace rewards us for the value we bring it, nothing more nothing less. We can either bring more money to the marketplace to put more into a deal, or, we can bring other value beyond money such as the skill of finding a distressed asset in need of repair, and growing in the wizardry of optimization of that asset. In other words, a brrrr-STR hybrid, or, a value add play on a non-brrr which doesn’t yet look like an STR until Re-developed into one. If the preferred return isn’t sitting in the marketplace like low hanging fruit, it is found somewhere else via tactful negotiation, deal hunting skills, and networking with those who source such opportunities. It is more work, but it also has an increase of value and thus ROI.