ROI, DSCR, COC, CAP rate Oh My!

[Christopher Derr]

So I recently got an accepted offer on my first SFH intentional rental. I have had a rental for 5 years previous owner. During the entire process I've read every book I can get my hands on, cash flow quadrant, rich dad poor dad, build a rental property empire, millionaire real estate investor, set for life.

My head is literally going to explode. 2% rule, $100/door, DSCR, Cash on Cash, it feels like you can manipulate any number you want to make a property fit one of the categories, and everyone says to figure out what works for you. Since I am starting out I don't really know what works for me yet, I am sure I'll adjust and find out.

So I have a local lender that will do commercial loans aslong as the DSCR is 1.25 or better. I bought a rental that could rent tomorrow if I wanted to but we were going to do a little bit of updating hoping to increase the rent a bit. The house was 49k. 5k down 25yrs at 4.5% (P/I)=$244 Taxes =$64 Insurance =$42 Property management =$52 (will decrease after 3 rentals) Maintenance at 10% $65 vacancy 5% $32.50 = $151/cashflow (assuming $650 mo rent, possibly closer to $700-$725 with updates and 1 pet, althought id increase maintenance by the difference probably). This is with 5k down and 1k closing. Obviously I could increase my Cashflow by putting more down, and typically I know people are forced to do 20% with traditional mortgages. Also it could be more cashflow if compared to a 30yr loan vs 25yr.

I can buy $70k SFH with $10k down and cashflow $190 plus on 25yr loans but I am putting more into the homes, slightly better neighborhoods, I know you don't count on appreciation or liquidity, and eventually I will get into multi family houses that cashflow better but we wanted 3-4 SFH to make 100% sure this is something we can handle and want long term.

Do you put more down to increase cashflow, do you put less down but leverage to the gills?  I can buy 2 properties with 10k down and cashflow $150 each or I can buy 1 with 10k down and cashflow $190+.

Every time I think I have it figured out I throw a new scenario in there, Anyone start a certain way and make an adjustment later, I'd just like a couple feel good stories on different peoples approach and how it ended up working for them or what clicked to make you change your strategy?

P.S. I currently have a great job (I will continue to invest $1,500 of my own income each month into rental properties and roll all income generated in as well) Cashflow is reinvestment only not to live on or use for bills so I don't know if that changes anything in someones opinion?

Thanks in advance for your response.   I FINALLY PULLED THE TRIGGER, thats a huge step in itself.

[Michael Evans]

You want to calculate your cash-on-cash Return On Investment (ROI) on an annualized basis. I use the following example: You have $100,000 to invest. Do you invest it and buy a $100,000 property that generates $15,000 in net income per year for a cash-on-cash ROI of 15%, or do you buy 10 properties that cost $100,000 each and each one generates a net income of $10,000 per year based on you using leverage to invest $10,000 in each property by getting a loan of $90,000 for each property (assumes $5,000 per year in financing costs)?

In the second scenario your $100,000 generates $100,000 in a year (ROI = 100%) due to leverage. I use leverage exclusively in my investing because it supercharges ROI and it shifts risks. Would you rather put all of you $100,000 into a single property or into 10 properties and spread the risk?

Leverage is a tool like fire.  It can be used to create great wealth or it can be used to destroy it.  Be careful how you use it.

Stay Blessed!