HOW MUCH CASH ON CASH RETURN SHOULD YOU LOOK FOR?

Question

Hi guys,

I'm new to this game, just wondering what kind of ROI you look for when buying a rental property. Is anyone familiar with Canadian markets? I live in Montreal Canada.

Thanks,

Carlo

JD Martin · Answer

@Jonathan Makovsky you make a great point in the last part of your post:

"if you are using IRR to measure your ROI then the more cash you can earn as quick as possible is the best play. (Personally, I don't think this is the best approach for the small mom-and-pop investors because this assumes you consistently reinvest the returns earned into other deals almost immediately and I don't think most of us are sophisticated to do this.)"

I don't think this point is mentioned often enough in BP. Every third post is someone that wants to jettison the 9-5 job today and live off the proceeds of their real estate. It's not realistic! REI is like any other business, most of which require reinvestment of profits for at least some time in order to grow the business to a point of self-sustenance.

Jonathan Makovsky · Answer

@Carlo Marroni Great question!

I think these are some of the ROI components you need to be conscious of to answer your question:

1. It's personal: what ROI are you happy with?

- What would you be happy with? You are going to see investors with all types of returns to ridiculously high ones to negative returns and some people that BS with their numbers (intentionally or unintentionally). So I think the first question is are you okay getting 3%, 5%, 7%, do you need a double digit return? Also, when do you want to start earning your ROI? (More about this last question in #4.)

2. [As you mentioned] what ROI is your local-Montreal market trading on?

- This is something that hopefully local investors in your market will chime in on. However, I imagine the returns will differ significantly depending on where in Montreal you are investing in. So knowing the micro-market in your city is really important to understand what cap-rates are trading on.

3. What asset-class are you investing in?

As you know, the higher the risk the higher the reward: Class A properties in a high-end. growing market will likely yield lower returns, than a Class C property in a non-growth population. (At least this is likely true in the short-term.)

4. How long are you looking to invest for/when do you want to realize the cash-flow?

- What is your timeframe for making a return?

- If it's very short-term (<1 yr) then maybe private lending or investing with a hard-money lender will work best. If you want the year-over-year cash-on-cash return then maybe a Class B/C property will work best for you. If you can identify a growing area where you believe the appreciation will be forced up due to stronger rents then maybe you take a hit on smaller year-over-year returns and gear up for a big splash down the road.

5. How are you measuring ROI?

- This is more of a technical question.

But if you are using IRR to measure your ROI then the more cash you can earn as quick as possible is the best play. (Personally, I don't think this is the best approach for the small mom-and-pop investors because this assumes you consistently reinvest the returns earned into other deals almost immediately and I don't think most of us are sophisticated to do this.)

Then if you are looking at a cash-on-cash return, when are you okay with it starting to pay out? As mentioned in #4, what you are comfortable with will come into play here.

Hope this is helpful.