Is this a Good Long Term Deal e.g. 5 years?

Question

I have a deal to purchase a property for 272K cash with ARV of 320K. My plan is to keep as a rental property. I've got a confirmed tenant for 2 years with projected Gross income of 24,000 per year. I'm estimating NOI of 10,600 per year for 5 yrs. I estimate appreciation at 3% per year. What is a good target or Cash on Cash Return?

Jeffrey Gant · Answer

Thank you all for the valuable feedback. I’m purchasing through my SDIRA, which will shelter the rental income. Appreciation remains a crucial factor in my decision.

Ashish Acharya · Answer

@Jeffrey Gant Your cash-on-cash return (CoC) is a key metric for evaluating this deal. Since you’re buying all cash, CoC is simply NOI ÷ Total Investment. Based on your numbers:

• Total Investment = $272K
• Annual NOI = $10,600
• Cash-on-Cash Return = $10,600 ÷ $272,000 = 3.9%

A 3.9% CoC return is on the lower end for a long-term rental, but if you factor in 3% appreciation, your total return improves. Over 5 years, the property could appreciate to ~$370K, adding around $100K in equity if market conditions hold.

From a tax standpoint, you can depreciate the property (excluding land value), which could shelter rental income from taxes. However, when you sell, depreciation recapture tax (up to 25%) and capital gains tax (0-20%) may apply unless you do a 1031 exchange to defer taxes.

For a solid long-term rental, investors typically aim for at least a 6-8% CoC return or higher. If appreciation and tax benefits align with your goals, it could still be a decent wealth-building play.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Jeffrey Gant · Answer

Thanks @Matthew Bernal appreciate the breakdown.

Matthew Bernal · Answer

You're in a solid position with a cash purchase and a tenant locked in for two years, which eliminates initial vacancy risks. Let's break down your Cash-on-Cash Return (CoC) target and whether this deal aligns with strong investment returns.

1️⃣ Calculate Your Cash-on-Cash Return (CoC)

Formula:

• Total Cash Invested = $272,000 (since you're buying in cash)
• Annual NOI = $10,600

Is 3.9% Good? 🔹 For cash purchases, investors typically aim for 6%–10%+ CoC returns. 🔹 3.9% is low for a pure cash deal, but appreciation & rent growth may improve the long-term picture.

2️⃣ Return When Factoring in Appreciation

You're estimating 3% appreciation annually. After 5 years, estimated property value:

That’s $50K in appreciation in addition to your rental income. Your total return (NOI + appreciation):

Over 5 years, this represents a 37.8% total return on your $272K investment (before selling costs).

3️⃣ How to Improve Your CoC Return

✅ Leverage the Purchase with a Mortgage

• Even at 50% LTV financing, your CoC return can jump to 10%–15% due to less cash invested.

✅ Increase Rent Over Time

• If rents increase 3–5% per year, your NOI rises, improving returns.

✅ Consider a Cash-Out Refinance Later

• If the property appreciates to $370K, you can pull cash out and reinvest in another deal.

Final Thoughts: Is This a Good Deal?

• For a purely cash purchase, 3.9% CoC is below ideal.
• If you plan to hold long-term & expect rent growth/appreciation, it can work.
• If you prefer higher returns now, consider adding leverage or finding a deal with stronger rental cash flow.

Jaycee Greene · Answer

Hey @Jeffrey Gant, welcome to the BP Forum! Your NOI seems very low IMO. Do you have really high real estate taxes or insurance premiums? Most developers I work with that focus on CoC returns, they target 8%-12%. I ran your numbers through my own proforma and I'm coming up with a CoC of 8.38% over 5 years (assumes sale price of $369k).

Daniel Tanasa · Answer

Hello Jeffrey,

Coc return is generally not that great when you're buying something cash. Real Estate usually works best when is leveraged, and the more money you live in a deal the less CoC return you make generally. But with the high rates I understand the appeal on buying something cash. You're at 3.9% based on your numbers, which is not terrible. I usually try to be at 10% or more with my investments but in todays market getting a 6 or 7% is still decent.

Keep in mind that in your number you don't account for the mortgage pay down and the tax benefits so your actual IRR is a bit higher.

If is a solid property in an area where you want to hold long term I would say go for it. You have the option to do a cash out refinance down the road when rates are more favorable.

Good luck!

Jeffrey Gant · Answer

Correction: A good target for Cash on Cash Return

Is this a Good Long Term Deal e.g. 5 years?

Is this a Good Long Term Deal e.g. 5 years?

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7 Replies

1️⃣ Calculate Your Cash-on-Cash Return (CoC)

2️⃣ Return When Factoring in Appreciation

3️⃣ How to Improve Your CoC Return

Final Thoughts: Is This a Good Deal?