Good Cash on Cash Return for STR If Paying Cash for the Property?

Question

Hi everyone,

I am 23 and newly learning STR. My parents are paying all cash on a property (reason being we're internationals without a credit score and therefore very high interest rate) and they want me to turn the house into an Airbnb. The property would cash flow about 2,300 per month. But the CoCR is only 9% because of the initial 100% cash investment. I know it's not a great CoCR AT ALL for a typical STR property that is taking out a loan. So I want to ask, what is a good CoCR when paying all cash? What other metrics should I be considering and mindful of? Thank you so much!

Leslie Anne Morris · Answer

8-12% is usually good for most investors in your situation. So sounds like you’re looking good.

Matthew Drouin · Answer

@Elizabeth Chan

I hate to be the heretic here but 9% cash on cash for a short term rental is not great.

STRs are much more management intensive than long term rentals.  And more risks too.

9% on a LTR, assuming if it was in a good location and not a ton of deferred maintenance would be fantastic.

But that being said, if it’s your first deal and you really like it, it will be an invaluable learning experience, even if it doesn’t make the best financial sense.

You’re going to make mistakes any way you play it.  But no mistakes are going to prove fatal especially if you are taking on no debt with the purchase.

Happy to talk more if you like.  Take care!

Brooklyn McCarty · Answer

Sometimes you have to look beyond the COC. People invest for other reasons too. While COC is one of the major metrics used to look at STRS, it’s not the only one

Scott K. · Answer

Awful. I would never do it. 9 percent even on an LTR is low. You could get that doing a mutual fund and never touch it for years. Real estate rarely makes any sense doing full cash investment. Even less when it's an STR because 1. You have to work for that return 2. You're probably not going to get 9 percent because you're new, and you aren't thinking of all the expenses.

Andrew Steffens · Answer

Hi Elizabeth

This varies by market but me personally I am looking at 15-25% depending on the asset.  For CoC you should just be taking the NOI and dividing by total asset cost.  To determine NOI you will take the gross income and subtract ALL expenses to include taxes and insurance, property management, utilities, etc.

Dave Foster · Answer

@Elizabeth Chan, First of all 9% c o c compared to any cash investment in the stock market for 100 years is pretty darn good.  Especially because it's not a disappearing asset.

2nd though - you're not making just 9%.  You've also got depreciation and appreciation.   So your actual return is much higher.

No risk, a cash on cash return that is higher than the historical average for a cash investment, an asset that does not become smaller with valuation, and two other sources of return.  I don't know why that's not a winner.

Patricia Andriolo-Bull · Answer

I may be in the minority here.  I mostly read of others discussing he power of leverage and I get it but I've been a firm believer of reducing leverage as much as possible and has worked well for me.  Starting from nothing I have ~$5M in real estate (one primary residence, the other 3 a mix of STR and LTR, self managed and property manager) mostly unleveraged.  I worked hard to pay off mortgages and sacrificed in other areas.  One property (my STR which does well has a small mortgage to help offset taxable income).  I retired at 49.  I bring this up because I am about to 1031 into a property with only 6% CoC.  After reading your post I questioned by decision but it works for me.  It's a $2M property that also doesn't achiever the 1% rule.  But as someone that is W-2 retired, I look at this as a longer term appreciating asset that will give me monthly fixed income.  I expect to cash flow $11K / month on this property.  I could purchase more properties and garner higher income but will require more work.  I have traditional brokerage account investments also.  This is a way for me to diversify and take a longer term real estate play. So think about your overall strategy and not just what other investors say you should try to hit from a CoC return or any of the other investing rules.

Terrell Garren · Answer

Insightful and rarely mentioned.  Diversification and asset appreciation factor into my REI.  I'll take 9% as long as the expenses are inclusive of everything - opex and capex.  An investor has to find somewhere to put money to work.

Robin Simon · Answer

I don't think this is a bad cash-on-cash return in this environment/market.  CoC is usually dependent/heavily juiced by leverage so you are going to be really hard pressed to find any returns much higher unlevered

Good Cash on Cash Return for STR If Paying Cash for the Property?

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