CoC return on a STR?

[Jordan M.]

Hey everyone! I'm going for my first STR, and was curious to what kind of CoC return you like to see with your property? What is the minimum return you would like to see before you move forward?

[Joe Splitrock]

Originally posted by @Collin Hays:

Luke that always begs the question “10% of gross rents or net”?  Net being after your mortgage, taxes, utilities, insurance, repairs, and maintenance.  

There is only one way to calculate CoC, but obviously it is affected greatly by all the things you mentioned. More importantly, it is affected by how much cash you have into the deal, which is what @Luke Carl was implying. CoC is calculated using net income divided by cash into the deal. I purchased a short term rental last September using my line of credit, with only $5000 into the deal. I furnished it for around $7000, which I took as a 100% tax write off last year. All total around $12,000 into the deal. My net cash flow over the last year was $13,000 after all expenses, including debt payments. That is over 100% CoC, but keep in perspective I entered the deal with very little equity in the property. Had I paid all cash for the purchase, my numbers would have been much different. I would have had $137,000 into the deal and $20,000 cash flow for CoC return of 14.5%. If you can minimize cash into the deal, you maximize CoC return, but also reduce cash flow. The property in my example is self managed and is a small house near a hospital. Luke and other people in this business are buying larger properties in vacation destinations. That means higher up front cost and higher daily rate. It also means more net cash at a given CoC rate. If Luke is getting 10% CoC return with $200K into a deal, that is $20K. It is still more total cash than I am getting 100% return. That means he is more cash for probably the same effort as I am getting less cash. Time is a factor here too.

There is no right or wrong answer with numbers like CoC return, but understanding how the numbers work and what they represent is critical. Just saying a percentage is good or bad without context is not as useful. Of course we all want to maximize return. Just be aware other things figure into the long term equation like tax benefits, equity growth through debt pay down and appreciation.