# Investment criteria and resources

> The four metrics a deal must clear in its first year, the assumptions behind the return calculation, and what those terms mean.

Where to learn more about Entrust and its approach to real estate investing, including the criteria for a good deal and the assumptions used to calculate return on investment.

## Buying a house is easy

Buying an investment property can seem intimidating, but it does not have to be. Entrust's clients range in age from 19 to 80, and many of them bought one or more investment properties before purchasing their own home. It helps to have money for a down payment of 15-25% and good credit, but even that is not a hard and fast rule in the investment world.

## The criteria

A good investment must meet all of the following metrics in the first year, at a minimum. A deal that does not meet all of them is not considered a good candidate for long-term rental investment. There are exceptions, but only in extenuating circumstances.

- Cash on cash ROI: 9% or better
- CAP rate: 8%
- Cash on cash ROI plus principal pay down, when using debt: 20%
- Debt coverage ratio: 1.2

These four were chosen because together they cannot be easily manipulated by debt. A higher loan to value would likely increase the cash on cash return but simultaneously decrease the debt coverage ratio, and since the CAP rate does not consider leverage it is a good measure of overall pricing. All purchases must also be at or below fair market value.

## What the terms mean

- Cash on cash (CoC) ROI: the return of the net profit after all expenses on the initial cash investment, which is net profit divided by cash outlay.
- CAP rate: net operating income divided by cost of investment. Net operating income is gross revenue minus operating expenses, and does not consider debt service.
- Principal pay down (PPD): the amount the loan principal is reduced as a result of consistent payments.
- Debt coverage ratio (DCR): net operating income divided by principal and interest payment. It shows how well an investment's revenue covers its debt obligations.

## The assumptions

- 20-25% down payment
- 20 year amortization, fixed for 5 years
- 10% property management
- Monthly property insurance of $70, unless specified differently
- Annual maintenance of $600, although each home should specify more detail

Potential appreciation of the local market is considered but does not directly affect any of the calculations. No current interest rate is published here, because an out-of-date one is worse than none.

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- Canonical page: https://entrust.investments/investors/criteria
- This document: https://entrust.investments/investors/criteria.md
- Site overview for agents: https://entrust.investments/llms.txt
- Entrust Investments, LLC, (615) 488-8784, contact@entrustinvestments.com