Author Topic: Minimum cash on cash return?  (Read 2872 times)

Buckeyes1

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Minimum cash on cash return?
« on: January 18, 2016, 01:24:57 PM »
Hey guys,

I've recently decided that I want to get a rental property or two to diversify my portfolio. I'm looking for SFHs in the Columbus market right now (~B class neighborhood). I'm looking to use a PM for now, and am trying to get something more or less turnkey.

I've been using the J Scott spreadsheet to calculate Cash on Cash returns, but I'm wondering what would be considered a "good deal" or what my minimum threshold should be. Of around 20 or so that I've looked at, 10% is the best that I've found (at full asking price, so could negotiate).

Is this what I should target for an offer or keep looking?

Thanks!

clarkfan1979

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Re: Minimum cash on cash return?
« Reply #1 on: January 18, 2016, 02:30:54 PM »
I wouldn't rely on someone to tell you what is a "good deal" I would do more research and try to come to that conclusion on your own. If you can't figure it out on your own, you might not be ready.

It also depends on how much time is required by you. The more time required the higher the return should be.

Invest in a neighborhood that you know and understand.


Buckeyes1

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Re: Minimum cash on cash return?
« Reply #2 on: January 18, 2016, 06:38:37 PM »
Let me rephrase. In reading Biggerpockets for months,, I have seen people there quoting COC returns of 15-25%. I have not found anything close to this in the 4 months that I've been looking.  I am guessing that higher rates of return are possible with distressed properties, but I am not looking for that at this point in time. Once I get more experience, I might be interested.

For more turnkey properties, is 10% more what I should expect, or do I need to keep looking? Since RE involves liquidity risk, I want a minimum hurdle rate to aim for. Figured there would be some ideas from those who've been there before.

iamlindoro

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Re: Minimum cash on cash return?
« Reply #3 on: January 18, 2016, 07:27:30 PM »
I invest very close to your market.  In that market, I own only duplexes.  I am getting 15-20% cash-on-cash returns.  My properties were not purchased distressed, though each has needed between $2-5K of minor deferred maintenance corrected. 

I wish I could tell you that there was a magic to it, but the truth is that I am just fairly picky (though I don't think excessively so).  I know that some people find the occasional diamond in the rough, and hope that I will happen upon one some day.  My properties, though, are just solid, unglamorous, decent deals.  The owner is eager to sell for one reason or another, I manage to get a low offer accepted, I get whatever else I can back upon inspection, and I operate in B-/C+ areas.  I am also very very diligent about monitoring *everything* that comes on the market and getting my broker into it ASAP if it's promising.  It's unglamorous, but in the end, you kiss a lot of frogs to find the prince ;)

One thing to consider in Columbus is whether it makes sense to pay water as the landlord (as many do in your area) or to drop the rent and bill the tenants for water.  When I started investing in Ohio, I was pushed hard to include water.  I have since come to believe that this was for the convenience of my property manager, after talking to a lot of landlords there who bill their tenants for water.  I'm moving to add submetering to my duplexes, and to use a new lease where the tenant will pay water/sewer.  Even after dropping rent $50/mo, I project that I will come out ahead between 900-1000 per year.
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iamlindoro

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Re: Minimum cash on cash return?
« Reply #4 on: January 18, 2016, 07:34:33 PM »
I'm just going to throw out a few more places where I have recently made changes to increase COCR:

1) Don't use property manager's landscaping service, if you plan to pay for one.  For a SFH, make the tenant responsible.  For a duplex, either give a tenant a very small rent discount to mow and send you biweekly pictures, or find someone on Craigslist to do the same, telling them that you will send payment only on receipt of a before and after picture (from a smartphone, these will be geotagged and datestamped). (My costs went from 66/month -> 30/month per property)

2) Comparison shop the hell out of insurance.  I just saved a few hundred bucks per year on each of my Ohio duplexes by spending an afternoon getting a bunch of quotes. (Insurance on example property went from 904/year -> 679/year)

3) Switch to tenant paid water if it makes sense, as mentioned above. (900-1000 savings per year per property projected, but I am only beginning to implement this, I do not have any signed leases with tenant paid water yet)

Each of these things ever so slightly increases the amount of attention needed from you, but they are really so minor in the grand scheme of things.
« Last Edit: January 18, 2016, 07:38:22 PM by iamlindoro »
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MaikoTsumi

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Re: Minimum cash on cash return?
« Reply #5 on: January 19, 2016, 10:55:27 AM »
I can't speak to your local market, but I can get 20-30% cash on cash on properties in my area.  Generally, I'm not looking for "turnkey" as I expect to put in some sweat equity into the properties I buy.

    Property management is not hard to do yourself.  One problem with the 10% figure PM's charge is that it is generally not all inclusive.  You will have maintenance assessments (possibly at higher rates than you could do yourself or hire out yourself), extra charges for filling evictions, court appearance charges, etc.  So your 10% COC could be cut in half just these things then add in plumbing or roofing issues and you easily go negative.

    My personal experience in my local market(SFH) is that PM firms set the rents or convince the owners to set the rent's at the very highest end of what the market will pay.   I'm always checking out what the competition is charging and I'll see similar rentals $200-$300 higher than mine.  You'd think I'm charging way to little, maybe but these other rentals spend 90-180 days on market.  That's $3500-$7000 lost rent for me.
     I just rehabbed my latest rental and got it on market in November.  The worst time of year.  Two doors down a house for rent $175 more than mine has been listed according to Zillow since August.  December comes around and my phone is ringing off the hook and I place a tenant with a multiyear lease that started January 1st.  The day after I pull my sign down, the PM from the other house calls me and asks if I got a tenant and what I charged.  I told him and he tells me he hasn't had a call in months.  That house is still not rented.   
     My opinion is that the PM's don't really care how long it takes. If they can drive up the rent price, they will eventually get the higher fee at no cost to them, but huge costs to the owner.

Papa bear

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Re: Minimum cash on cash return?
« Reply #6 on: January 19, 2016, 11:02:55 AM »
I look for 18% + cash on cash in Columbus.  I have friends here who do much better than that as well.  They are buying smaller places in the 40k range in Columbus taxes, other city school district areas.

I can't find anything I'm Columbus worth buying that's in your desirable living areas - prices are too high compared to rents.  Good luck.


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Buckeyes1

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Re: Minimum cash on cash return?
« Reply #7 on: January 19, 2016, 05:31:40 PM »
I invest very close to your market.  In that market, I own only duplexes.  I am getting 15-20% cash-on-cash returns.  My properties were not purchased distressed, though each has needed between $2-5K of minor deferred maintenance corrected. 

I wish I could tell you that there was a magic to it, but the truth is that I am just fairly picky (though I don't think excessively so).  I know that some people find the occasional diamond in the rough, and hope that I will happen upon one some day.  My properties, though, are just solid, unglamorous, decent deals.  The owner is eager to sell for one reason or another, I manage to get a low offer accepted, I get whatever else I can back upon inspection, and I operate in B-/C+ areas.  I am also very very diligent about monitoring *everything* that comes on the market and getting my broker into it ASAP if it's promising.  It's unglamorous, but in the end, you kiss a lot of frogs to find the prince ;)

One thing to consider in Columbus is whether it makes sense to pay water as the landlord (as many do in your area) or to drop the rent and bill the tenants for water.  When I started investing in Ohio, I was pushed hard to include water.  I have since come to believe that this was for the convenience of my property manager, after talking to a lot of landlords there who bill their tenants for water.  I'm moving to add submetering to my duplexes, and to use a new lease where the tenant will pay water/sewer.  Even after dropping rent $50/mo, I project that I will come out ahead between 900-1000 per year.

Thanks for the tips. From what I've read, duplexes tend to be higher COC wise, so perhaps my numbers aren't too far off.  I might be able to squeeze a little more out if I find a better deal, though.
 
For the first deal, I'd like to stick to a SFH...if it turns out I hate it (hope not), it'd be easier to sell and/or move into myself.

As for the water, my PM has said they require the tenants to pay for water and all utilities, so I'm factoring that in.

Buckeyes1

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Re: Minimum cash on cash return?
« Reply #8 on: January 19, 2016, 05:37:10 PM »
I can't speak to your local market, but I can get 20-30% cash on cash on properties in my area.  Generally, I'm not looking for "turnkey" as I expect to put in some sweat equity into the properties I buy.

    Property management is not hard to do yourself.  One problem with the 10% figure PM's charge is that it is generally not all inclusive.  You will have maintenance assessments (possibly at higher rates than you could do yourself or hire out yourself), extra charges for filling evictions, court appearance charges, etc.  So your 10% COC could be cut in half just these things then add in plumbing or roofing issues and you easily go negative.

    My personal experience in my local market(SFH) is that PM firms set the rents or convince the owners to set the rent's at the very highest end of what the market will pay.   I'm always checking out what the competition is charging and I'll see similar rentals $200-$300 higher than mine.  You'd think I'm charging way to little, maybe but these other rentals spend 90-180 days on market.  That's $3500-$7000 lost rent for me.
     I just rehabbed my latest rental and got it on market in November.  The worst time of year.  Two doors down a house for rent $175 more than mine has been listed according to Zillow since August.  December comes around and my phone is ringing off the hook and I place a tenant with a multiyear lease that started January 1st.  The day after I pull my sign down, the PM from the other house calls me and asks if I got a tenant and what I charged.  I told him and he tells me he hasn't had a call in months.  That house is still not rented.   
     My opinion is that the PM's don't really care how long it takes. If they can drive up the rent price, they will eventually get the higher fee at no cost to them, but huge costs to the owner.

True, have heard that about PM's, though the one I'm working with seems to be pretty good. My boss uses them for another unit, and has good things to say. If it gets bad, I could always do it myself, though I would outsource repairs definitely.

As for the rental price, we are going to aim for the high end of the market for a few weeks and see if there's any bites. If not, we'll lower the rate. Definitely want to avoid an extended vacancy as you mentioned.

Buckeyes1

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Re: Minimum cash on cash return?
« Reply #9 on: January 19, 2016, 05:39:17 PM »
I look for 18% + cash on cash in Columbus.  I have friends here who do much better than that as well.  They are buying smaller places in the 40k range in Columbus taxes, other city school district areas.

I can't find anything I'm Columbus worth buying that's in your desirable living areas - prices are too high compared to rents.  Good luck.


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Are these foreclosures or houses in the crappier areas (Hilltop)? I'm not really looking for those types of properties...my dad had a rental for a long time in similar areas, and has scared me away from those tenants! :)

Papa bear

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Re: Minimum cash on cash return?
« Reply #10 on: January 19, 2016, 06:01:37 PM »

I look for 18% + cash on cash in Columbus.  I have friends here who do much better than that as well.  They are buying smaller places in the 40k range in Columbus taxes, other city school district areas.

I can't find anything I'm Columbus worth buying that's in your desirable living areas - prices are too high compared to rents.  Good luck.


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Are these foreclosures or houses in the crappier areas (Hilltop)? I'm not really looking for those types of properties...my dad had a rental for a long time in similar areas, and has scared me away from those tenants! :)

They have done really well on the east side, Westerville south schools, southwest city schools, etc.

The houses aren't foreclosures, but they do need work.  Their biggest slowdown is finding reliable contractors. 


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Buckeyes1

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Re: Minimum cash on cash return?
« Reply #11 on: January 20, 2016, 03:41:28 AM »
Yes, that is the biggest barrier (mentally) for me in taking on a fixer upper. Finding a reliable contractor is a feat of itself..

Blindsquirrel

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Re: Minimum cash on cash return?
« Reply #12 on: January 30, 2016, 06:34:09 PM »
   I invest in Oh also and love the Buckeyes, We do SFR's only but have a couple apartments and a duplex that we ended up with because the yield was crazy high $800 a month after expenses on 28 k investment. Most deals we do are 3 bedroom and above. Turnover on bigger houses is very low. We do not buy turn keys, we buy foreclosures only and fix them. Paying retail for a house is a mistake IMO as the equity gain from just paint, carpet, and fixing some BS is very large. Would rather I get the equity gain from fixing up a bit than someone else. Shoot me a PM with you phone number and we can chat. Advice is free and worth the price but we have 23 paid off units and I have run rentals for 18 years and we have flipped a dozen or so.
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Jon Bon

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Re: Minimum cash on cash return?
« Reply #13 on: January 30, 2016, 07:53:21 PM »
I know columbus pretty well and agree with papa bear 18% cash on cash return is a decent deal.

However the past year I have seen returns in columbus get steadily worse.

As this is your first property I assume, I think you should look for a more turn key property in the 12-15% range. That is still really good money and your going to be positive cash flow day one which is hugely important for someone just starting out. 

Renovations can't get rapidly out of hand and if you don't have adaquate reserves you might lose the house and I'll buy it at the auction for a song!!  :)

Seriously pm me if you have specific questions.