Cash-on-cash, Cap-rate ??
am i off base here?
cash-on-cash is somewhat useless. If i found a property that cash flowed with 99.99% financing with 1$ down, my cash-on-cash would be over the top.
cap rate is useful but better to use cash flow.
when money is cheap, like now, use the banks money whenever possible. a fully amortized loan at 6.5% on 100K versus 80K only differs by $1524 per year. So if you put down 20% on a 100K property, you cash flow another $1524 annually, hardly seems worth putting down 20K if you can get a good rate.
i see comments like:
) I buy at 15 years, with 100% financed, at a positive cashflow. 20 units @ $200.00 per month positive cashflow is $4,000.00 they will be paid off in 15 years w/ a much larger cashflow and I will have the ability to retire. I am now at 32 units.
) Boston a decent multie will cost you around $500K .. you'd maybe find 20-40% cash on cash return. Brockton .. maybe $400K with 40-50% and say you would be willing to buy in Springfield.. you may get a 4 family for $130K with 50-100% cash return.
I don't know what to make of these comments. I haven't found any multi-family beyond a 20% cap rate. I don't see how purchasing a 4 family for $130 would yield %100 return. Are they saying it cash flows twice what the loan service would be on $130K? If so, why would anyone sell it?
Maybe being in CA explains why I don't see any deals like this. Are these pie-in the-sky or can someone show me a real multi-family listing that has these numbers?
is it a good time to buy multi-family units when rates are low, or do the owners generally adjust the sale price? If they adjust, maybe it's better to buy when rates are high expecting to refi when rates drop. making any sense here?
Thanks for helping a newbie.
Quote:...a fully amortized loan at 6.5% on 100K versus 80K only differs by $1524 per year. So if you put down 20% on a 100K property, you cash flow another $1524 annually, hardly seems worth putting down 20K if you can get a good rate.If you do the arithmetic, that $20K downpayment is generating $1524 in extra cash flow. That alone is a 7.5% return. If the property is breakeven at 100% financing, and generates a positive cash flow of $1524 with 80% financing, then you say that your cash-on-cash return is 7.5% in this 80% financing example.
Quote:Springfield.. you may get a 4 family for $130K with 50-100% cash return.
I don't see how purchasing a 4 family for $130 would yield %100 return. Are they saying it cash flows twice what the loan service would be on $130K?The poster is saying that you can get 50-100% of your initial out of pocket investment back. If your downpayment is only $5K, then your positive cash flow only needs to be $2500 per year to have a cash-on-cash return of 50%. Remember, cash flow is what you have left over after all expenses AND debt service have been paid. Or, put another way, the cash flow is what you pay income taxes on.
DaveT,
Thank you very much for replying to my cash-on-cash questions, it really helped. I think I should begin looking at multi-family numbers in and out of the state to see if my concerns about CA real-estate being overpriced has spread to multi-family income and commercial properties.
Thanks again!!
Cap Rate = projected first year unleveraged net cash flow/purchase price. Same as your 1st year cash-on-cash should you pay all cash for the property.
Leverage: when your financing costs less than your cap rate you have positive leverage and your cash-on-cash return will be enhanced. Likewise, if your adjustable rate financing increases to a point above your cap rate, you have negative leverage and your cash-on-cash suffers.
I'm familiar with the Santa Barbara and Los Angeles markets and agree with you that units are priced very high based on cap rates. Cap rates in the 4% - 5% aren't uncommon. Only a few years ago cap rates were around 8%. Buying units two years ago was smart, today, as a small investor I'd be very cautious.
My advice, try to find properties with significant upside in rents and consider locking in your financing once it appears rates are moving up.
Cap rate applies to NOI before debt to determine a "value" for the entire property.
Cash-on-cash refers to the NOI after debt as a function of the "equity".
You are right Cash-on-cash is largely a function of how big a downpayment you make and is easily skewed by "creative" techiniques which reduce the downstroke. Unfortunately all that leverage cuts both ways and the negative cash flow (if there is any) as a function of "equity" can be equally huge.
Part of your confusion about the "cash on cash" deals you are seeing is that multi-family sellers tend to be smarter about understanding what their property is worth so cap rates and rates of return are much more "realistic" in both senses i.e. they don't look as good and they are more likely to actually happen.
As to whether it is better to buy in a high-rate market or low. This is one of those misleading questions. The correct time to buy is when the deal is right-- it has nothing to do with anything else.
Mark