What is a good CoC ROI for rental properties?

So, you and your friends are thinking about co-buying a home. And when you’re not using it, perhaps you’re thinking about renting it out. You’ll want to understand how much you can rent it out for and compare it with how much money you are spending on the home (mortgage, taxes, management, etc.)

Many first-time investors don’t know where to begin or if the investment will eventually pay off.

Today, we will explore the basics of vacation home investment and what cash on cash return on investment (CoC ROI) is ideal for a property.‍

Renting your home short-term (STR) or long-term (LTR)

If you’re new to real estate investing, rental properties can be single-family homes, apartment complexes, townhouses, condominiums, duplexes, and more. The primary advantage of owning and renting out a property is the potential monthly cash flow you get from paying tenants/guests. Another key is deciding if you want to long-term (30 consecutive days or more) or short-term (less than 30 consecutive days) rent your property. The right answer depends on your preferences and goals.

Short-term rentals are short. Think Airbnb or VRBO. It could be condos, apartments, duplexes, one room, two rooms, or an entire house. Guest stays for short term rentals are shorter than 30 days. A couple downsides to short term rentals is that you constantly have different guests coming in and out of your property, therefore potentially requiring more maintenance. It also requires a lot more of your attention. You would need to respond to messages, hire cleaners, deal with demanding guests and more. But, the big upside is that the returns can be significantly higher than renting your property long term. However, you’ll need to see if your city is allowing new permits for STRs.

Long-term rentals are leased for longer periods, typically a year or longer. Long-term rentals are the most common type of lease agreement. One main disadvantage to long-term rentals is that they generally earn less than short-term rentals. This method may be preferable to some people because you don’t have to deal with a high turnover rate and rent each month stays the same, whereas returns for short term rentals may fluctuate depending on the season.

What is a good CoC ROI?

ROI is a metric used to measure the profitability of a property, and is expressed as a percentage. Cash-on-cash (CoC) ROI is a helpful metric used by investors to evaluate performance by comparing the net profit generated from the rental property against the cash investment made. CoC ROI helps paint a more accurate picture of the cash flowing to and from your bank account at the end of the day.

“What is a good CoC ROI?” is a common question but the answer is subjective. It depends on several factors, such as location, property type, operating expenses, and so on. Real estate investors can agree that anything above 8% is a good return and anything above that is considered great.

Some people look to buy vacation homes and may not consider cash flow at all, as long as they get to use the property when they want and the income earned covers most, if not all of the expenses. This approach is fine too because people can also make money from their property appreciating over the years, but some extra cash every month doesn’t hurt.

How to calculate CoC ROI

CoC ROI is typically calculated by subtracting your annual rental income from annual operating costs. Divide that number by the total amount you’ve spent out of pocket for the property (i.e., down payment, closing costs, renovations, furnishings, etc.) to calculate ROI.

One way many groups maximize their CoC ROI for short-term rentals is to work with a property management company to keep the property occupied and set competitive rates. By minimizing vacancies and charging rent or nightly rates that are in line with the market, property managers can help you get the absolute best rate of return on your investment. Another tip for short-term rentals is to make sure your home has amenities to make it stand out.

The bottom line

If you co-buy a home and plan to rent it out, short term or long term, familiarize your group with the rate of return formula and how to calculate potential ROI on your rental property. This is the surest way to ensure your property is a smart investment.

Nestment, Inc. does not guarantee and is in no way responsible for the accuracy of information provided in this blog post. All information is provided “AS IS” and with all faults. Data presented here may not reflect all real estate activity in the market.  While the information on this site is about legal and tax issues, it is not intended as legal or tax advice or as a substitute for the particularized advice of your own attorney and tax professional.