my go to metric.....

[Stephen Sawrie]

so i am 7 properties into this RE thingy, and have been leaning heavily upon a seasoned mentor throughout.  however, as i try to wrap my mind around the metrics of analyzing a deal, it seems that, well, the "go to metric" sort of depends on the situation.

i have two LLCs. the first holds IRA money and is self-directed, and currently owns four properties that were purchased with cash. seems that the best metric here is the cap rate? i realize that this is used a lot in commercial properties, but it appears to be the best metric to analyze and compare deals when financing is not a variable. thoughts?

the second is my "after-tax" LLC, and i have currently purchased three properties and am about to finance them all into one loan with my newly minted portfolio manager. they are all much like the properties purchased in the first LLC...35-45K, foreclosures, each needs 0-5K basic rehab, and each rents for 750-800/month. in this instance, however, my plan is to pick up 2-3 at a time with a LOC and then bundle and finance. so my first three properties total 139K after rehab, and i plan on taking 110K out and putting that back towards LOC, so I will have 29K of my own money in once i fully zero out the LOC. While I have read about the wonders of cash flow with multiple properties all financed around 70% LTV, I don't really care about cash flow for the next 5-10 years with the exception of not wanting to be negative. But after that period I want my properties to be cash flowing at their full potential, which to me means having the note paid off. my "sweet spot" for financing comes in at 7-8 years in which my cash flow will essentially be zero after taking into acct taxes, ins, capex, vacancy, property mgmt, etc. In this scenario the CoC return and cash flow metrics really suck for the life of the loan because of the aggressive repayment schedule, but again, i don't care about these metrics as long as i don't negatively cash flow during that period. so once again it seems that the best metric in the initial deal analysis is the cap rate?

so bottom line...when using the BP rental property calculator or my own (admittedly more crude) spreadsheet, it seems as if CoC and cash flow do not have to be the holy grail depending on circumstances and goals. where have i gone wrong?

[Rick Pozos]

@Stephen Sawrie Everybody has a different take on things. I try to live well within my means and put the money into notes, rentals, etc that will really payoff later on down the road like yourself. Since this is the only thing that I do, I flip a deal here and there and wholesale a few properties to pay the bills. BUT it is really important that the cash flow really picks up later in life.

I personally think that it is FANTASTIC that you can put little or no money down and have a property paid for in 7 to 10 years. Multiplied several times per year over time will get your income back without working. That is real estate investing!!!