170% Cash on Cash Return! THAT JUST HAPPENED!

[Justin B.]

So before people get on me about bragging, please notice I did put this into the real estate success stories forum :). We are buying our 10th property (a milestone by itself), but the real story here is the numbers. I'm constantly surprised with what's out there. Where did we find this one? The REO list from our bank. I'm also posting this because I want to show people that fantastic deals are out there.

The numbers are really insane. Below is what we're looking at.:
-- Area: OK. Not great, but not bad either, but OK areas is where we typically invest.
-- Purchase Price: $37,000
-- Down Payment: 5%
-- Property Management: 10% fee monthly
-- Rent: $750/month (You are reading that correctly).
-- Taxes: $900/year
-- Insurance: $300/year
-- Vacancy Rate: 0% (It's already rented upon purchase)
-- Money put into it: $0 (Upon inspection there is nothing for us to do).

Here are the results from my analysis spreadsheet:
Cash on Cash Return: 170.15%
Debt Coverage Ratio: 2.378
Vacancy Breakeven: 44.43%
Operating Expense Ratio: 23.33%
BreakEven Ratio: 55.57%

Capitalization Rate: 18.65%
Gross Rent Multiplier: 4.111
Net Income Multiplier: 5.362
LTV Ratio: 95.00%
Monthly Rent to Value %: 2.03%

Cash Flow: $331.20/month - The amazing thing about this number is it's WITH a property manager taking 10%.
5-year IRR (using 2% appreciation): 175%
10-year IRR (using 2% appreciation): 172%
Present Value: $11,678
Net Present Value: $9,328
Profitability Index: 4.97

Before anyone starts to say how a price this low isn't somewhere they want to be, listen to this. It's a 1,200 sq/ft 3 bedroom, 1 bath house. It's a typical SFR. I happen to invest in MS where prices are lower than most other places in the country. The house is in great shape, already rented, and we have to put $0 into it. Anyway, just felt like tooting my own horn for 5 minutes :)

[J Scott]

Originally posted by @Justin B.:

Originally posted by @John Thedford:

I see a problem with the numbers as well. Until you calculate vacancies, maintenance, CapEx, etc you don't have a true picture of your returns. Also, as other mentioned, what about closing costs?

There is no problem with the numbers. This is an SFR, so when it goes vacant, it's 100% vacant. Again, I could put an estimate of vacancy but I chose not to because it's currently rented and not vacant. When I first evaluate properties (what I call my 5 minute analysis), I use 10% as a vacancy rate, $50/month per $1,000/month rent (Over the years I've found that to be very accurate). All the other expenses I have (Taxes, Insurance, PM) are pretty easy to get accurate up front. Even at that, the numbers still blow me away.

I think John's point was that you're leaving several expenses out of your cash flow equation. When you are inaccurate with your cash flow, your cash on cash return is going to be inaccurate as well. Your true cash flow, and resulting cash on cash return, will be lower once you factor in things like vacancy, maintenance, Capex, etc.

Not factoring in longer term expenses into your cash flow and CoC is like claiming that your meal is free because the waiter hasn't brought you the bill yet.