Is Cash on Cash Return Irrelevant in Arizona?

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Is Cash on Cash Return Irrelevant in Arizona?

Ryan Stumbo
Rental Property Investor · Member since 2021 · 63 posts · 27 votes

So, recently I have been trying to branch out and buy real estate in other states. I'm currently working in Arizona so I thought "hmm it's nice out here, I should try to get a property or two while I'm out here." I am running into an issue. I'm very big on the numbers. I take every monthly/annual expense and calculate the cash on cash return, and if it isn't at least 8% then it's not worth it to me to even invest. 

I have now went to 2 different realtors, looked at some multi-family properties, typed the numbers in, and I've had 1 deal come back as a -55% CoC return. Then another was at like -90% CoC return. I do my numbers and see what kind of price is doable for me. Now, obviously with the deal being that overpriced, I could just not even attempt it, but when something has been on the market for 120 days, I figure heck why not just make an offer. Even if they view it as lowball, attach my spreadsheet to the offer and show them their property is way overpriced without directly telling them that and maybe they'll come to their senses. Me thinking the realtors would respect math also and see that I'm correct, I've had 2 realtors tell me "you're just not in tune with the Phoenix market." At this point, I will ask them politely to explain what this statement means because my math shows this deal is a terrible deal. They didn't respond. Just the vague "you don't understand Phoenix market." So I guess my question is, is there something I'm missing? One of the realtors also said that if I'm looking for 5% return in this market I may as well go ahead and go back to where I was investing before because that ship has sailed. So is this a case of it's just not possible to find 8% returns in this market in a decent location? Or do they actually have any logic or math behind what they're saying. Is there some deeper, specific reason someone is willing to pay for something that returns them a negative % on their money? This 1 realtor also told me there's a lot of "institutional money" here and that people are willing to use real estate to park their money and just take the loss because it keeps the IRS from getting their money.


I suppose in summary I'm asking, 1) are these realtors just trying to talk me into a bad deal and I just lucked out with the 2 realtors I found

2) Do I truly not understand something about the market down here and these -50-100% returns aren't so bad after all? (lol unlikely, since math is math.)

3) are these realtors just intimidated by making an offer they view as lowball since the listing price is so overpriced?

If someone can explain to me what I'm missing I would be happy and open to learning and understanding. I'm just truly not understanding what it means to instead of critiquing a list price that leaves you with a -50% return, I am instead being the one critiqued for not "understanding the market" .. lol any info on this situation would be greatly appreciated.

Thanks in advance.

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Zach LemasterBusiness Member
Rental Property Investor · Denver, CO · Member since 2015 · 2k+ posts · 3k+ votes
5y

@Ryan Stumbo

In my opinion you are really asking about multiple different types of investments here. Is AZ a great place to find double digit CoC ROI, no. It is an outstanding market for flips however (at least right now). You can get agents to throw lowball offers out, but most are likely hesitant to do that knowing it might be a waste of time being such a sellers market. You can find the right one that will spend the time to go through multiple offers if they know you will bring them a lot of business. They are just few and far between in a hot market.

I do high end flips in Phoenix, and the margins are pretty stellar.  Buy for $500k to 800k, put in ~$200k, sell retail in a week or less for over $1M (usually $150k to $250k net profit)!  Just rough numbers, but that is typical to see.  I like AZ for those opportunities, not buy & hold rentals.

I like the idea of house hacking something that has some deferred maintenance or value add!

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  • Ryan Stumbo
    OP
    Rental Property Investor · Member since 2021 · 63 posts · 27 votes
    5y

    @Casey Powers you’re the only one I’ve dismissed because in my eyes you have no more credentials than anyone else on this thread. yet you speak as if you know all and choose to disguise rudeness as bluntly speaking. Notice how every other person I thanked them for their input. Maybe 2-3 people out of the 5 million responses I said seemed. The others have all messaged me with more ACTUAL advice. Also, is a realtor blowing you off also if they still contact you and ask you if you’re interested in a deal? Idk if you’re dating a realtor or just trying to kiss some …. But it looks desperate. Not a good look. Be blunt. Be honest. But don’t be biased and disrespectful. Please say your last words and leave me be.

    0Reply
  • Tony Kim
    Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
    5y
    Originally posted by @Casey Powers:
    Originally posted by @Ryan Stumbo:

    @Dan Heuschele now that was informative and helpful without any bashing of me..

     
    Not one person has bashed you here. If your attitude here is how you approached the agents who blew you off, then it’s clear why they didn’t want to spend any time on you and simply chose to brush you off. Without any offense intended again. 

    I agree with the above. Folks are just trying to help and he's just getting into it with everyone.  Hmmm, what's the common theme here? The hypersensitivity is kinda amusing really...

    4Reply
  • Sameer A.
    Los Angeles, CA · Member since 2016 · 7 posts · 4 votes
    5y

    @Ryan Stumbo I am new to RE investing and I bought my first 4-plex in Phoenix in December 2020. I put 25% down and borrowed the rest at a sub-3% interest rate. That property is now generating COC of about 5%, but it took a few months to stabilize and get to that point. Aside from that 5% COC return, I am getting a similar 5% return in Year 1 as I pay down my principal and build more equity. Finally, as cap rates have compressed, the property has appreciated about 9% (or about 36% on my invested capital). I have been under contract on 2-3 more deals since then that fell through, but I am still looking aggressively.

    Given the competitiveness and high price point of the California markets near me, I knew I wanted to invest elsewhere to cut my teeth and likely earn a better return. When I started looking at deals in late 2019, I determined that Phoenix offered some cash flow and the chance for substantial appreciation. While cap rates have compressed, these deals still exist, even on the MLS.

    With TSMC building its plant (2000 jobs in the next 4 years) and Intel expanding its plant (3000 new jobs over the life of the project), there are going to be 10-20,000 or more jobs created in the Phoenix area overall, including companies and services that will follow to serve these companies and their employees.  This does not include the many "temporary" construction jobs that will be created while these massive facilities are being built.  Many of these jobs are highly technical and will pay more than the median.  Populations and incomes are rising in the Phoenix area and this is a trend that doesn't appear to be slowing down any time soon.

    I don't invest in Arcadia, but there is a reason prices there have been bid up so much.  That said, I don't invest in the more beaten-up areas of Phoenix either, where more cash flow can be had.  There are large areas where it's not unreasonable to assume that rents will grow 3-5% annually for several years.  And remember that when rent goes up by $50 on one of your units, that's $600 more of cash flow per year, which should add $12K to your property value at a 5% cap rate.

    All of this is to say I am happy with minor (and growing) cash flow in Phoenix to start because I believe that cash flow has considerable growth potential over time.  Meanwhile, larger returns will be made in the appreciation of the property.

    1Reply
  • Ryan Stumbo
    OP
    Rental Property Investor · Member since 2021 · 63 posts · 27 votes
    5y
    Originally posted by @Tony Kim:
    Originally posted by @Casey Powers:
    Originally posted by @Ryan Stumbo:

    @Dan Heuschele now that was informative and helpful without any bashing of me..

     
    Not one person has bashed you here. If your attitude here is how you approached the agents who blew you off, then it’s clear why they didn’t want to spend any time on you and simply chose to brush you off. Without any offense intended again. 

    I agree with the above. Folks are just trying to help and he's just getting into it with everyone.  Hmmm, what's the common theme here? The hypersensitivity is kinda amusing really...

    LOL yet you chose to respond. I got plenty of help at this point. The services are no longer needed. Thank you for your concern.  

    0Reply
  • Ryan Stumbo
    OP
    Rental Property Investor · Member since 2021 · 63 posts · 27 votes
    5y

    @Sameer A. that’s awesome man. I’m just going to have to stay patient and keep looking. Only been looking about a month so it’s highly likely I just am not being patient enough haha.. I have the capital to invest so maybe a fixer upper is more my style. A decent to good area where I can add equity. It’s probably going to be a lot harder to add equity in places like Arcadia compared to places like Mesa. What are your favorite areas to invest in specifically?

    0Reply
  • Rafael Norat
    Investor · Lodi, NJ · Member since 2013 · 487 posts · 179 votes
    5y

    Hey Ryan! You're situation is very similar across the entire country. 

    1) Most realtors are not investors and usually rely on appreciation as their main factor. Be patient and surround yourself with like-minded investors. 

    2) Cash on Cash even in today's syndicate deals are positive, with syndicate deals being over inflated as well.

    3) No. They most likely do not know any better and have a multitude of people itching to spend money..

    Reach out to me and I'd be more than happy to give you my opinion in and out of state with regards to your investing goals.

    0Reply
  • Ryan Stumbo
    OP
    Rental Property Investor · Member since 2021 · 63 posts · 27 votes
    5y

    @Rafael Norat just added you man. Thanks a ton for the insight. I’ll shoot you a message!

    0Reply
  • Zach LemasterBusiness Member
    Rental Property Investor · Denver, CO · Member since 2015 · 2k+ posts · 3k+ votes
    5y

    @Ryan Stumbo

    In my opinion you are really asking about multiple different types of investments here. Is AZ a great place to find double digit CoC ROI, no. It is an outstanding market for flips however (at least right now). You can get agents to throw lowball offers out, but most are likely hesitant to do that knowing it might be a waste of time being such a sellers market. You can find the right one that will spend the time to go through multiple offers if they know you will bring them a lot of business. They are just few and far between in a hot market.

    I do high end flips in Phoenix, and the margins are pretty stellar.  Buy for $500k to 800k, put in ~$200k, sell retail in a week or less for over $1M (usually $150k to $250k net profit)!  Just rough numbers, but that is typical to see.  I like AZ for those opportunities, not buy & hold rentals.

    I like the idea of house hacking something that has some deferred maintenance or value add!

    [email protected]800-311-6781Podcast Guest on Show How to Get 10%+ Off Your Next Real Estate Deal Right Now
    Rent To Retirement5335 Reviews
    WebsiteView Page
    7Reply
  • Ryan Stumbo
    OP
    Rental Property Investor · Member since 2021 · 63 posts · 27 votes
    5y

    @Zach Lemaster I wish I was experienced enough to manage flips right now but don’t know that I can devote the time to it still working my 9-5 job honestly. But I do still think it’s possible to buy fixer upper single family homes and rent to traveling employees by the bedroom. I do this back in my home state and triple the profits, and down here there’s even more traveling employees than there so it could work. Thanks for the advice!

    1Reply
  • Thomas Corley
    Real Estate Agent · Phoenix, AZ · Member since 2018 · 127 posts · 62 votes
    5y

    @Ryan Stumbo Your not crazy! I would never do a deal with negative COC and it's very possible to find a cash flowing property in AZ! Find an inventory friendly agent that will find those deals or surround yourself with people doing deals. Good luck!

    0Reply
  • Paul MoorePro Member
    Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
    5y

    Hi @Ryan Stumbo. I really appreciate the way you’re interacting with everyone on this thread who is trying to offer input. That makes for a great forum post.

    Sometimes it’s good for real estate investors to step outside of our world and look at the broader investment arena. Legendary investors like Warren Buffett would classify a non-cash flowing investment speculation, in general at least. If you want to speculate that’s fine, however just realize that it’s not the same as investing.  Some of the greatest gains in history are made by speculators, but more often they lose money. Ithink Buffett would say that you need to look for cash flow first and then treat appreciation as a bonus. 

    I consider a true wealth as having assets that produce cash flow. Buffett said, “If you don’t learn to make money while you sleep you’ll have to work until you die.”  

    You’ve got some great advice in this thread and it sounds like it’s helped you make a decision. Congrats.

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    0Reply
  • Ryan Stumbo
    OP
    Rental Property Investor · Member since 2021 · 63 posts · 27 votes
    5y
    Originally posted by @Paul Moore:

    Hi @Ryan Stumbo. I really appreciate the way you’re interacting with everyone on this thread who is trying to offer input. That makes for a great forum post.

    Sometimes it’s good for real estate investors to step outside of our world and look at the broader investment arena. Legendary investors like Warren Buffett would classify a non-cash flowing investment speculation, in general at least. If you want to speculate that’s fine, however just realize that it’s not the same as investing.  Some of the greatest gains in history are made by speculators, but more often they lose money. Ithink Buffett would say that you need to look for cash flow first and then treat appreciation as a bonus. 

    I consider a true wealth as having assets that produce cash flow. Buffett said, “If you don’t learn to make money while you sleep you’ll have to work until you die.”  

    You’ve got some great advice in this thread and it sounds like it’s helped you make a decision. Congrats.

    Haha I can’t tell if you do appreciate it or sarcasm since text is hard to read, and some have said I’m “defensive” or have an “attitude” , but either way I appreciate every response. My entire meaning of the post was because every deal I analyzed for multi family properties seemed like my cash flow and return was coming back at negative percents based simply off the rental income and cash investment. So at this point I questioned am I missing something as a new investor, or why did so many realtors seem to be critiquing me and not critiquing the listing price at all or even looking at the numbers. The response I got from that is basically a lot of Arizona real estate sales are depending on appreciation and rent prices going even higher. Again, as you said, this seems like speculation to me. This market could grow 500% or it could absolutely crash. None of us really know. So with that being said, me personally, I’m not willing to buy a property based off “comps” or “appreciation” .. as a new investor, that is throwing a lot of risk into my equation when being new is already a lot of risk in itself. I appreciate your time in responding and hope no realtors were offended or think I’m a “low baller” .. as all my offers I’ve made, which is only 2 so far, were based off cash on cash return mathematics. It was good talking to you and thank you again!

    0Reply
  • Sameer A.
    Los Angeles, CA · Member since 2016 · 7 posts · 4 votes
    5y

    @Ryan Stumbo I focus on a wide strip from the Encanto area east to Camelback East Village and down south to the 10/202.  These areas are a little more reasonably priced than Arcadia.  I am not an expert on the area, but my realtor and property manager provide a lot of guidance when looking at a specific property.

    With regard to underwriting, I noticed that I was sometimes being too conservative. I think it's healthy to be conservative and stress-test the numbers, but I was originally modeling for 7% COC in a good area and on a property that was in good shape. That just wasn't going to happen in Phoenix, so I had to settle on modeling for 3-4% COC with conservative numbers. Then I started to notice that 1 or 2 deals out of every 20 or 30 started to make the cut and were worthy of further research.

    I think you can get 7% or more COC if you buy a fixer-upper and renovate, but I feel like a lot of the prime areas of Phoenix have been picked over. Turning a house into a duplex, or adding/renovating an ADU, these kinds of things will generate a lot of value for you if you have the time. I'd like to do a deal with some value-add and renovation at some point, but I haven't found the right property as yet.

    0Reply
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