Loan pay down calculated into coc Roi

[Chris K.]

Hi everyone,

Why is the loan pay down not calculated into coc roi? Meaning, if I have tenants (short term or long term) where the cash flow covers my mortgage payment?

I will use basic example to help clarify.

Down payment of $20,000

mortgage payment is $1000

All Expenses (capex, utilities etc) : $500

Monthly income $1,550

Positive cash flow of $50 monthly x 12 = $600 annually

600/20,000 = 3% (bad roi)

But I am also building equity with loan pay down of 1,000 monthly so should I not be calculating this into my roi technically????

That would make $12,600 annually. And if it’s not calculated into roi, why is it not?

Thank you!

[Andy Mirza]

@Chris K. The best metric to use for what you're looking for is Internal Rate of Return (IRR). This will take appreciation and loan paydown into consideration when calculating an approximate annual return for your investment. It will also take into consideration your cash flows when they come in.

Your inputs are your general ledger entries. The first one will be the purchase price. The last one will be the net proceeds when you sell. Your regular cashflows will be all of the cashflows in between. For simplicity's sake, group them by year or month.

You can use a financial calculator but excel is quicker and easier. Research the =IRR and =XIRR functions.