Potential Investment Efficiency Analysis

[Tim French]

I'm working on a project for my master's degree in applied math; in particular, it involves being able to consider multiple factors at once to rank potential investments for which one yields the most efficient return on investment.

The method analyzes inputs and outputs for which property most efficiently maximizes outputs, given its particular inputs.

Inputs I'm using right now: Down Payment Amount, Rehab Costs, and Mortgage Amount.

Outputs I'm using right now: Monthly Cash Flow, Cash-on-Cash Return, Cap Rate, and Initial Equity.

For inputs, I figured down payment is a given, and I decided to keep rehab costs as its own category (rather than lumping it in with down payment as a total initial cash investment) because a higher rehab cost will usually have more time and effort that go along with it. I've thought about adding an input for # of units, figuring that a 2-, 3-, or 4-unit (or more) property will generally require more landlord effort than a SFH. I've also considered adding payback period as an input (because lower is better) and debt coverage ratio as an output. I don't want to get too many inputs and outputs going on at once, so I'm trying to focus on the top factors a person would want to look at for what makes for an efficient return on investment.

I've grabbed numbers on some different properties, and it's been pretty interesting to see what different combinations of factors tend to come out on top. I also think this method could be a useful tool for an investor to analyze current investments where we could have inputs for things like monthly time commitment or general annoyance level.

Anyway, I thought I'd see what you all think. Is there anything that you would add or remove from my list of inputs and outputs to analyze?

[Immanuel Sibero]

@Tim French

"My main goal is to capture the most commonly used metrics..."

Ahh... I see. Your first post suggests that you're looking for .. "which one yields the most efficient return on investment."
It just so happens that on BP the most commonly used metrics are not necessarily the most efficient measure of return on investment. A property with higher CoC may have lower IRR than another property. Given the same level of risks, I would choose to invest in the other property with lower CoC and higher IRR. But YES, many investors would just look at the CoC. Worse yet... they would look at cap rate!!... which is not even a measure of return. Best of luck with your project!

Cheers... Immanuel