Is a 8.20% Cash on Cash return good for multi-fam investment?

Question

Hi All -

I am looking to buy a 3 flat and move into a unit for a year to be able to capitalize on favorable interest rates for a 'buy and hold' investment in Bucktown.

I ran the numbers on this property that I really like and I am showing the property is a 7.09% Cap and has a 8.20% CoC return. What is the forum's opinon of these numbers?

I have read conflicting opinions on both of these metrics when trying to pre-determine which is a good measurement of whether this will be a good investment or not.

Jonathan Klemm · Answer

@Roderick McCleary - If it is your 1st deal I say go for it either way.  Bucktown and surrounding neighborhoods will always continue to appreciate OVER TIME.  However, I agree with Account Closed those numbers dont quite sound right.

The hardest deal is always your first so get that one under your belt and then you will be off to the races.

If you end up closing on the deal and are need of any rehab or maintenance assistance definitely hit me up and I would love to help you out.  Our awesome tech company in my signature is doing cool things in the Chicago and Milwaukee markets to help busy landlords like yourself.

Henry Lazerow · Answer

8% in bucktown is great. Awesome area that should see annual rent increases with good tenants who pay on time.

Make sure you are including all expenses. A lot of first time investors miss stuff like water, common electric, snow/lawn, etc.

Good luck with the property. If any questions on realistic rents, etc. Feel free to message me happy to glance over your numbers.

Sarah Lewis · Answer

Is the property really in Bucktown proper?

Jake Fugman · Answer

@Roderick McCleary  If you are using safe expense figures I would say that anything over 5% in Bucktown is great! A lot of properties in Wicker Park and Bucktown are break at best if putting under 20% down.  I would make sure to include variables expenses in the range of 4-6% repair / 4-6% capEx / and 5-10% vacancy expenses... ON TOP of the fixed insurance, taxes, and utilities.

Are you including the cash for repairs in your calculations?   $2300-2400/unit is very strong rental income if they are 2 bedroom units so you would have to make sure your units are competing with the newer luxury 2 bed rentals on the near NW side of Chicago that are going for $2500-3000/mo that come with parking and pool :)   I like using the site/app called HomeSnap for mapping out rental comps.

Good luck!

Eric Sanders · Answer

If you are getting 8.2% while house hacking, that's unreal.

If 8.2% is while you're not living there, i'd let you know that the average annual rate of return for the S&P is 9.8%.

Real estate  can be a lot more consistent and there's room for greater returns depending on what you do to the property, and factoring in appreciation.

Considering the time spent landlording/maintaining the property, you have to ask yourself if that time is spent well given the 8.2% CoC return, equity gained, and possible appreciation, compared to the 9.8% return on the S&P.

Tim Sipowicz · Answer

I’m very new to REI but I don’t believe an 8% return is bad by any means, I think you would like to be between 10-12% but that’s just referring back to what Brandon Turner of BP states for his investments. What is the cash flow for each unit, if you don’t mind me asking. Again, I’m new to this but I don’t believe those returns are bad. Curious to see what more experience investors have to say tho, good luck!

Sarita Scherpereel · Answer

@Roderick McCleary in Bucktown this is great! I’m slight worried about your analysis just because this seems a bit high for the area...without knowing how your analyzing the property. But if you’re correct this sounds like a great deal for Bucktown. I’d say go for it!

Crystal Smith · Answer

My 1st reaction is the numbers are hard to believe as an owner occupant in Bucktown. But let's assume your numbers are right. The only one who can determine if it's a good number is you. Do you have other opportunities to get > 8.2% CoC from other investments? There are certain expectations for what to expect in Bucktown & it's less than what you've projected as an owner-occupant, but an opinion on whether it's a good investment or not is really a function of your own targets.

Jonathan R McLaughlin · Answer

@Roderick McCleary I'm concerned about your overall #s since you said that the property "cash flows" $2366 per unit. Cash flow should be calculated as income after expenses, which should include debt, taxes, insurance (the classic PITI) as well as prudent allowances for vacancy, repairs and capital expenses. Just a quick check that your 8.2% COC includes all that. Don't know your market or debt structure, but at that COC rate it sounds like your internal rate of return would be around 13%-14% including loan pay down. Pretty decent if its a relatively low maintenance property

Allan C. · Answer

@Eric Sanders I’d be cautious making comparisons between different investment classes as the basis is often very different.  Most people overlook net returns (post tax), as opposed to focusing on gross returns.  Cash flow from rental income also provides investment optionality as you have full flexibility to utilize that cash however you deem fit, as opposed to letting your investment ride.

Is a 8.20% Cash on Cash return good for multi-fam investment?

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