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?