Rental ROI

[Adam Fout]

When analyzing a deal, should an investor who finances the deal with a conventional loan factor in ROI on debt pay down and ROI on appreciation?

Example: I am looking at a property to purchase for $132,000, 25% down on a 30 year note and the monthly rent is $1,050. Total upfront cost is $37,440 (Closing costs, repairs, down payment) After expenses, the ROI on cash flow is 4.77%. This seems low until you calculate the other two. Annual loan pay down is $5,671 which gives a ROI of 15.15%. Ohio's average appreciation rate is 3.52% so using that percentage The property should appreciate $5,533.50 the first year with an initial FMV $155,000. The ROI on appreciation is 14.78%. When you add these three together you get a total ROI of 34.7%!

The problem I see with this model, is if you rely on all 3 numbers you could have negative cash flow and still calculate a positive ROI. Just wondering what other poeple's thoughts are on this subject?

[Levi T.]

Just look at the net cash after debt services for rate of return for your CoC, but do keep an eye on Cap rates, as it will give you a bigger picture as things move along with more deals. Equity it just a bonus in the end. I personally use equity as a downpayment play, if you can get more equity on the deal you can lower your cash down payment, thus improving your CoC. Also just because the average appreciation goes up, don't mean you'll get that. Every owner/landlord sold me their property for what they paid for it 10-35 years ago over the last 3 years. Life happens, so don't depend on appreciation, depend on cashflow and let the appreciation give you leverage when the time is right.