Live-in flips: should mortgage costs be included in C-O-C calcs?

Question

If I am evaluating a property that I intend to live in while renovating to prepare it for sale (in 6 months or so), do I need to include the mortgage costs +utilities, etc while living there in the calculations for Cash-On-Cash return to determine whether it is a good deal?  After all, I need to be living somewhere, right? And whatever home I am living in will need to be financed, anyway. So....

I am considering this as a strategy for the short term while relocating in Colorado and this first purchase would be my only mortgaged property. (Yes, living in a house flip is not for everyone!) This way, I avoid having to buy one property to live in and one property to flip - twice as much cash outflow early on.  Of course, if both properties had investment potential - that would be another story. But, that is not my question here with this post (another Forum, perhaps).

Brent Coombs · Answer

@Patricia Miller, the answer to your title question is: for FLIPPERS, that's the wrong question.

Flippers don't talk in terms of CoC. They talk actual DOLLARS profit (or loss). I agree with Bill S.

eg. You buy for $100k with $20k down. Your expenses including closing costs (x 2), mortgage repayments and rehab costs equal say $40k. You sell it for $150k. You end up with $30k back in your pocket once you clear your loan ie. +$10k (then your fun with the IRS begins). [Not tax advice].

The fact that you got a 50% CoC return for FLIPPING is irrelevant in the scheme of things. ONGOING net income is relevant as a CoC percentage for buy-to-hold investors, who have said goodbye to their original deposit for maybe many years to come. Hope that helps. All the best...

Mindy Jensen · Answer

@Patricia Miller, I never counted the mortgage, utilities, etc. I probably should have factored it in somehow.

You do have holding costs, but you also have to live somewhere and pay rent/mortgage there, too.

I'm not sure the right way to figure it. Maybe split it in half?

I lived in my flips for 2 years to avoid capital gains. I see you plan to live in it during a 6-month reno. Is that solely for saving money? You will have to hire out Electric and Plumbing if you aren't going to live in it for 2 years. Not sure if that was your plan anyway.

Run your numbers including hold costs. If it isn't a deal including them, I can't see it being much of a deal excluding them at only a 6-month hold.

Bill S. · Answer

@Patricia Miller you are splitting hairs with your analysis. In the end you have x $s. It doesn't matter if you calculate your return on what you start with as y%or z%. It's what you end up with that matters not if you get 15% return or not. Your goal is an amount of money or an income stream of some amount at the end of your time line. Sure a rate of return between here and there is important but that is the tool to gauge options not the goal. There is much judgement and consideration given to non-quantitative factors in projections. Not everything boils down to a number. It's my experience that people that put their head down and run their spreadsheets fail to reasonably consider non-quantitative challenging issues. They end up missing big picture things that are more detrimental to the plan than a delta of 2-3% because this or that line item is moved around. It's clear from your posts that you have the spreadsheet thing down so if you are going to miss is something it will be something that doesn't fit into the spreadsheet. That is my point.

Mindy Jensen · Answer

Jeff Beard, I've changed the abbreviation.

Patricia Miller · Answer

Thank you @Mindy Jensen and Jeff Beard

Jeff B. · Answer

@Patricia Miller  Another point of confusion here are the terms Cost-of-Cash (more apropos to flipping) vs Cash-on-Cash (apropos to rentals)  @Mindy JensenThe abbreviation CoC,  C-C, C/C is ambiguous.

The NOI is closely associated with Net Operating Income and the mouse-over definition is unambiguos.

Bill S. · Answer

@Brent Coombs great point. From the buy and hold end, my thinking was more along the lines of you figure cash on cash and you end up with property in the worst neighborhoods with challenging property management and low end tenants. You end up putting large chunks of time into the "investment" managing property managers or dealing with tenants doing evictions and the emotional toil of the drama of low end tenants. Where as a nice lower cash on cash return in a quality "A" neighborhood has very low overhead and is very easy to manage and low emotional toil. Some folks think well I'll just deal with the drama and get the higher COC but in the end they don't realize how this can limit their long term growth because it wears them out and takes up bandwidth to the point they aren't able to do more. Again the higher quality investment with lower returns offers them energy to pursue other more creative avenues that may ultimately yield a higher return. How do you put that in a spreadsheet?

Patricia Miller · Answer

Yes, @Brent Coombs that helps enormously! It is one thing to know which numbers to plug into which formulas, but in the end - understanding the useful application of these calculations is the most important piece. The reason your explanation is particularly helpful to me is because, in truth - I might be doing a live-in reno and decide to hold it for rental income, or if the market seems to point to a more profitable solution - I could sell it. Meanwhile, I have a place to live, albeit, short term.

The market in Denver is changing (as it is everywhere, I'm guessing) and the particulars of the job market, housing availability, and population fluxes makes for unique and dynamic circumstances. Moreover, good properties go very, very fast -- there are a lot of investors and people needing housing -- so there is a lot of competition. One needs to be clear about intended outcomes before making a purchase to avoid making big mistakes.

Because I am not currently set on needing the cash flow for the short term (next couple of years, or so) I am seeing that if I can look at a property from different angles, using the APPROPRIATE calculations, I can make better decisions. Eventually (within 5 years), cash flow with "passive income" is a solid goal. I can either start building that now with buy-and-holds or build equity through flips and have more to play with in a few years. At least, I think that is a reasonable strategy, assuming I can properly understand the implications with each purchase!

Patricia Miller · Answer

@Wayne Brooks and @Bill S. Thanks for all the feedback. Can't put the feedback in my spreadsheets, but I can certainly put the qualitative perspective on the table when I sit down and make that first purchase.

I see your point, Wayne, regarding hours of labor. As an artist, I am used to a very poor "return" in hourly rate so I guess I fail to consider that. Not sure, however, if I worked 40 hours/week at a desk job for 50 weeks and earned $100,000 how a COC would be calculated. (Or even if it is a good metric). Labor, perhaps, has a cash value, but how much? What is the cash inflow in this example (before the job begins) - especially since no cash has changed hands? Is it the same as the cash invested in a property?

I was under the impression that simple ROI (e.g. 10K in and 30K out) and COC provide an entirely different level of information - COC being much more comprehensive and therefore providing a better picture of the quality of the deal. As part of due diligence, I thought COC was essential.

Some of this discussion is actually more philosophical - forgive me for spinning off. However, because I  may be considering transferring money from equities in retirement accounts to REI, I want to be dang sure I am not getting less from my investment. You see, I truly don't like to just plug numbers in formulas. I want to really understand what any formula means - then maybe I can get the big picture piece, which, perhaps, shapes the final decision.

Jeff B. · Answer

Maybe I missed something above but

cash-on-cash is = (NOI - Mortgage Payments)  / your down payment.

Live-in flips: should mortgage costs be included in C-O-C calcs?

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