Break even in 7 years?

Question

If you have a 14% ROI on a rental and the investment is projected to break even in 7 years, what are your thoughts on that break even point? 14% is not bad and it's after deducting a huge cushion for expenses to reduce any chance of a surprise, but it will take 7 years to recoup the downpayment. How much weight do you normally put on the break even timeframe when evaluating an investment?

Joe Villeneuve · Answer

I agree with @Elizabeth  Colegrove about the importance of Cash returns.  I focus on real money...cash, not on Monopoly money...equity build up.

@Joseph Ball is also right on when he mentions he has rules he follows.  Once you set up a set of rules, or criteria, that each deal must have to move forward, you are less likely to get into bad deals.  Set up your rules, and don't rationalize your way out of them.

My rules are based on the strategy (enter/exit) that I am using for that property.  When I employ my best strategy (cash in, refi out) these are my rules:

1 - 100% plus CCR (I get all my cash I put in back within the first year).2 - Property must cash flow at least $300/month after refi with PM in place3 - I must be able to refi enough cash out to move quickly onto the next deal with all cash.

Elizabeth Colegrove · Answer

Peter, I don't look at it that way. I evaluate my cash on cash rate of return.

If you look at it in the way if you invested in the stock market how long would it take for your dividend to "break even" regarding you initial investment.

Peter Skobic · Answer

Thanks everyone for the replies!

@Joe Villeneuve your 1,2,3 rule is a great idea. I will try to implement the same in my deal analysis. Thanks for the perspective.

@Ben Leybovich  You are like a fail-safe mechanism for analyzing properties. The last line of defense before pulling the trigger. Thanks for all the info, both in the reply and in your podcasts!

Joe Villeneuve · Answer

@Ben Leybovich Well put.

Ben Leybovich · Answer

@Elizabeth  Colegrove - CCR does in fact evaluate break even period.  Think about it:

You put $10,000 cash into a building.  If pre-tax cash flow is 10%, this just tells you that you'll be made whole after 10 years.  If pre-tax CF is 20%, you'll be made whole in 5 years...and so on.

Why is this important?  Because most of us aren't made of money, and if you have to put dough in each deal you do, then the CCR defines how soon you'll be able to recycle your money and do another deal.

With this in mind, your thinking is right on @Petar Skobic .  Cash is a very expensive and scarce commodity.  There are a lot of very sophisticated ways to analyze return, but for a small investor the most intuitive is CCR since it tracks the cycle of your cash and tells you how fast you'll be able to grow (which is the point since there is strength in numbers).

The "read between the lines" backdrop to thins conversation is that the baseline for CCR is the amount of your investment.  This is why most successful investors try to put as little cash into the deal as possible.  This enters us into the world of creative finance, which is where I live and so does my good friend Brandon Turner (whom I taught well).

With limited cash, the essence of living another day is a function of having cash, so I keep mine :)  However, this requires us only taking action on the very best deals...

Hope this helps.  Good luck!

Joe Villeneuve · Answer

@Petar Skobic   Just a followup.  As you can see from my previous post, I break even within the first year.  I'm not waiting 7 years, or even 5 years.  If the early 2000's taught us anything, it's that anything can happen at any time, so the faster I can break even, the safer I feel.

Also, I need to break even ASAP so I can continue to move forward without hesitation.  It's all about money moving, not pausing/stopping...the speed of money.

Joe Villeneuve · Answer

None of us are.

Joseph Ball · Answer

Also, Joe Villeneuve isn't getting any younger...

Joseph Ball · Answer

My simple rule is I must get all of my investment back in 5 years. If the investment doesn't meet the 5 year rule, I continue to negotiate or move on.

I am a wholesaler. I apply that same rule for my buyers. I only sell, if my buyer receives all of his investment back in 5 years or less. Cardinal rule.

Break even in 7 years?

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