Cash on cash plus Equity build-up

[Ron Vered]

Hello,

Real-estate investors benefit from their investment with cash-flow and with the build-up in equity. However, it seems people look at cash-on-cash return but ignore equity build-up. This seems logical if you look at a few years, but after >= 10 years, it seems wrong to ignore the effect of appreciation.

Some areas exhibit more growth then others, so it seems there should be a more complete metric.

A real-estate investment professional has showed me (among other things) the metric which was named "Cash on cash with equity build-up". It is calculated in a similar way to plain CoC:

CoC w/ Equity = (Net cash-flow + Equity increase) / Initial investment

Where Equity increase is the only new term which is: (i) the increase in property value (est.) (ii) the reduction in loan balance.

This can be estimated for a few years ahead to show a trend. Of course, term (i) is a guess, but could be done conservatively.

Q1: Is this metric usable? If not, what do you use instead?

Q2: Can I compare this metric to an interest rate I get from an alternative investment?

Thank you!

Ron.

[Bryan O.]

As an investor without large amounts of capital, you stand to lose loads of money if you try and add apples (actual, known, real numbers) to oranges (best guess numbers). When I look at properties, I like to add in some appreciation, just to see what that does to my numbers, but that's just making my dream spreadsheet and not what I use to decide if it's a good deal.

I'm not there yet, but it seems the bigger guys want to make sure there is enough cash flow to meet their requirements, but they rely heavily on appreciation to create the wealth they are after. Maybe it's a SFR vs commercial mentality? Hopefully someone in that space can shine some more light on it.