Loan Paydown and Cash on Cash Return

[Greg Lott]

Hi all.

I haven't made the plunge into buying my first property yet, however I'm working hard on the analyze phase. I've spent the last two weeks, at least an hour a day, most days probably 2 or 3, looking at properties and tweaking my analyzing spreadsheet to best show me my ROI.

One thing I haven't heard a TON about (I have heard it, but not nearly as often as CoC) is loan paydown/built equity (which I believe are the same thing? Correct me if I'm wrong). I've been finding properties where I get a CoC ROI usually between 6 and 12% in the area, even with somewhat conservative numbers and a 10% contingency tacked on top of my expenses and that didn't excite me tremendously. What I realized though, was that the tenant(s) would be paying down the loan, which would be cash in my pocket if/when I sell the property.

When I add in the loan paydown, my ROI jumps 10, 15, 20, even 25%, and goes up every year. Granted, this money doesn't help me until the property is sold, however I think it's important to include when looking over a property. I even put this number next to a 7% growth in the stock market to see how it would compare and most properties peak in their difference over the stock market around year 12-15 on a 30 year loan.

Do you include the loan paydown? If not, do you consider it and does it help sway your analysis one way or anther? Let me know your thoughts, and if I'm way out in left field here.

[Thomas S.]

Equity does not count toward income until it is pulled out. Until it is pulled out (refinance or sale of property) it does not exist as profit or income and could easily vanish with a market adjustment.

Income and cash flow are very rough guestimates at best and can only be known at the time a property is sold. Until that point no one knows the numbers.

CoC can only be used to analyse properties initially or possibly in the first year of ownership. Beyond that CoC has too many variables to be easily calculated.

Equity pay down is possibly the highest risk/lowest return form of investing. It vanishes in a heart beat when the markets turn.