Is CoC different then ROI? Or is it the same?

Question

Good Afternoon Everyone,

I am very new to REI and also on BP. I am currently using the free version of the DealCheck App to analyze properties. The property analysis tool shows two different categories for the “cash on cash return” and the “return on investment”. Their numbers are different as well but I have heard Brandon Turner just talk about both together CoCROI. So it is different or is it the same thing?

Please assist.

Thank you.

Shreya

Account Closed · Answer

You can use the BP calculator to show both COC and ROI.  I like the IRR with expected lengths of time for the property. Note: I am only a buy and hold investor so I don’t flip or wholesale. I am more concerned with my IRR than both my CoC or ROI.  They all matter but for my specific situation they don’t mean much to me today.

pick a coc that works for you, I shot for the highest I can, but i am playing the long game. If you need money monthly shot for a higher coc.

Nick B. · Answer

CoC is your net income: rent - operating expenses - debt payments

Capital gain is the difference between your basis (purchase price + closing costs + capex) and your terminal value (sales price - cost of sale).

Bill B. · Answer

Cash on cash also doesn’t take in to account debt paydown.

Don’t get hung up on numbers, I’m making them up...imagine a very short term loan

You put down $20k on $100k property

Rent is $1000. $150 expenses and $800 debt payment (including $600 interest $200 pay down.)

COC is $600/year on $20k. 3%

ROI is $600/yr cashflow plus $2400/yr debt paydown or $3,000/year on $20k or 15%.

Sometime ROE or return on equity is more important. Year one it's the same as ROI or 15%. But once it's paid off now your making $850/mo (all cashflow no interest) or $10,200 on a paid off $100k property, which means only 10.2% down from 15%. Maybe down to 5% of the property has doubled during the loan pay down. So you do a cash out for $140k. Now your COC and ROI (negative $120k) is infinite and your ROE is back up towards 15%.

You can play with the numbers all you want. It shows how you can actually make a profit, or have income on a negative cashflow property.

Bill B. · Answer

@Shreya Modi

The $140k: You can take the $140k out with a tax free cashout refi. Since you only put $20k in, you now have negative $120k in the deal. You could just as easily take $40k out 5-10 years in and have negative money invested and infinite COC.

The negative cashflow with income property:  I have an expensive oos property I want to retire in. I take the standard deduction, so interest on my primary isn't tax deductible.  Hence I want it paid off when I move in to it. So it has a 15 year loan.

The rent is $2700/mo. The mortgage payment is $3125/mo. So the cash flow is negative $425/mo. But each month the principle balance goes down $1781. So my profit is $1355/mo on this one property. I kick in $425 and the tenant covers all the costs plus $1355 towards the balance.  The best part is the depreciation is over $15,000/year. So, while my profit is $16,260/year, I only pay tax on $1200/year, unless I spend $1200 on repairs, travel to inspect the property, etc, then my $15k is tax free.

If I decide not to rent it out in 6 years when its paid off and instead move in.  I'll retire in a free paid off lakefront property. If I make it my primary long enough I can capture most of the $200k in appreciation tax free as well. (Another part of the ROI)

I've been doing this 20 years and I'm just getting to the point where I have to start paying some taxes. With depreciation, cash out refis, and 1031 exchanges, real estate income is in a class all its own.

Ps. If I don't move in to it. It'll become a $2500/mo ($30k/year) income, and positive cash flow SFR property.  You end up with 4 of those in 15 years and you're probably doing ok. But I'd be paying tax on 1/2 that income for 12 years and then all of it after that.

Shreya Modi · Answer

@Bill Brandt Bill, thanks for your feedback and showing me a great calculation/example. I followed you until almost the end but lost you “from taking the cash out of $140k and your last paragraph.” How can someone make an income and profit from a property if the cash flow is negative?

Also, in your example, if I were to do a 30 yr Mtg... that’s a longgg time before I can see a good cash flow coming in and during this time the rent will probably increase as well with the property values. So I understand your point of not getting hung up on the numbers but isn’t conducting a proper calculation a heavy decision maker when analyzing and seriously considering a property?

Shreya Modi · Answer

@Eric C. Thanks for your feedback. I have heard about the IRR but still learning so not sure how to calculate it. Reading my first real estate book on “Rental Property Investing” by Brandon Turner.

My goal will be to buy and hold since I am not looking for having the income now (but if I get a good CoC then it’s better). I will be investing for the long haul so I could build a strong and solid real estate portfolio.

Shreya Modi · Answer

@Nick B.

Ok, now it make sense. So is it worth looking at or calculating the ROI when deciding on which property to invest in not knowing how long will I be holding that investment property?

I guess the other way of asking this question is “Do I need to guesstimate the ROI when considering a property to buy since I don’t know how long I will be holding it?” Or can it be enough just to calculate the CoC?

Shreya Modi · Answer

@Nick B.

If I am understanding this correctly, then CoC is what we are receiving (in rent) in comparison to the purchase price and the ROI includes the CoC plus the equity growth of the property hence the Capital Gains?

Shreya Modi · Answer

@Nick B.

Thanks for your prompt reply. So then what is the difference between CoC and Capital Gains, wouldn’t that be the same thing?

Nick B. · Answer

CoC is what you get paid relative to the money invested. ROI is your total profit (or loss) that includes CoC and capital gain (or loss). ROI can only be calculated upon the sale of the investment.

Is CoC different then ROI? Or is it the same?

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