Investor · Washington, US · Member since 2021 · 59 posts · 12 votes
I'm trying to analyze a property and my CoC for the first year is 10%.
My cash invested is 100k (Downpayment + closing costs + rehab) and my cash flow is 10k for the first year.
Let's say I calculated that my cashflow for the second year is 12k
How can I properly account for the second year, taking into account the future value of money?
ps: I'm aware that internal rate of return (IRR) can help me estimate that but it assumes the whole value of the property (equity), while I want to exclude equity from the equation, as I'm not going to either sell or refinance the property in the first few years for sure and thus want to analyze cash on cash year over year for the first few years only.
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
2y
There's no such thing as CoCR for any year after the first. Your trying to combine assumed future money with actual future money.
First, separate the cash part from the equity part. Combining the tow just makes it more inaccurate. Take the cash you put into the deal, and calculate how many years it will take you to recover that cash. just from your cash returns... your cash flow. That number is very important since you can't make any profit until the recover happens. No, you can't include equity growth in this calculation since equity isn't cash until it becomes real money...cash. That's a separate calculation.
Second, take your initial cost of the property and calculate your potential future equity growth. Do NOT include your initial equity that you paid for (down payment). That's a cost, and part of the "First" calculation only. This equity growth is your best profit since it should outpace your cash flow per year. This doesn't mean CF isn't important, and that accepting negative CF is OK. It isn't. You must have both in a deal, or don't do it.