How do you consider equity build up when analyzing a property?

[Roochita P.]

So many calculators I've seen ignore equity build up. Why is that? Is it because that equity is locked in the property and not available to you? 

I just think it's crazy to ignore the fact that somebody else's money is paying down your mortgage (interest AND principal). When you sell the property those principal payments become money in your pocket. Why wouldn't you factor that in? Most people use pure cash flow analysis for calculating after-tax returns, but in my opinion it ignores a huge part of the value of leveraged real estate investing. 

What am I missing? The practical implication for me is that I will look not only at traditional cash flow numbers (cash-on-cash, before tax, after tax) but I will also then factor in equity build up when generating a "complete" or "comprehensive" return. Maybe there's an actual word for that.

[Joseph Cacciapaglia]

A lot of my clients are total return investors. They look at cash flow, appreciation, equity pay down, and tax savings. They also pay a lot of attention to rent growth. Most of the data driven investors that I know actually focus on rent growth and appreciation more than anything else when selecting a market and property. I realize that the majority of people on BiggerPockets skew much more towards being cash flow investors, but I don't believe that's representative of professional investors in general.

When I worked for commercial REITs and other institutional investors, we always looked at IRR first, and cash flow was always a secondary test. We wanted to be sure we had enough cash flow to get us to the finish line, which was a future liquidity event where we unlocked the equity pay down and appreciation (both forced and market). The upside to this strategy is that it leads you to invest in better areas than a cash flow focused strategy would take you.