What's really important in analysis?

Question

I own rental property and am actively looking to continue to invest in multifamily. If Fidelity has been paying my wife and I about 12% AVG return, then my reasoning has been that - as an example - if I have $500,000 in retirement savings available that now pay me a return of 12% or $60,000 annually or $5k monthly (21%+ some years, -2% others, but 12% is the avg), and I wish to move that amount into buy and hold, the only motivation to do so must be that the deal is going to pay me better than 12%, or why bother? I'm checking in with you on my logic. For me, as a buy/hold investor, it would seem to me my number to look for is the cash flow and the COCROI. Maybe I'm missing something. Feel free to correct erroneous thinking.

So, correct me if I'm wrong, but the COCROI is the comparison number, without adding in everything else - appreciatian, tax considerations, etc, right?

COCROI for Yr 1 is easy enough formula to write. Isn't there a more elegant way to write a formula to get the TOTAL return, including appreciation, then the way I'm doing it here? If so, can anyone suggest something?

So, correct me if I'm wrong, but the COCROI is the comparison number, without adding in everything else - appreciatian, tax considerations, etc, right?

COCROI for Yr 1 is easy enough formula to write. Isn't there a more elegant way to write a formula to get the TOTAL return, including appreciation, then the way I'm doing it here? If so, can anyone suggest something?

Aaron K. · Answer

@David De Luna this is tough to do because with Fidelity you are including appreciation and dividends, you would need to do the same for RE, even cash flow is the wrong metric to compare to dividends, because as you pay down the mortgage a portion of every payment goes towards increasing your equity. You need to account for cash flow, appreciation, mortgage pay-down, and tax advantages to make it a fair comparison. In any respect don't put all your eggs in one basket and stay diversified.

Mike Krieg · Answer

One addition thought is that you need to examine the underlying risks associated with each asset. Multifamily Apartments have significantly lower risk, than the S&P 500. For this I cite Fannie and Freddie default rates during the 2007-2009 period where they were below 1%. Everything else got crushed. Apartments do carry risk, especially if poorly bought, but I'm speaking mainly as an industry.

Dennis M. · Answer

You cant stuff this into a neat sanitized algorithm/ calculation and compare returns . Ask the guys who were averaging 12% on their money back around 2000 /2001 what their return projections were after they lost a third of their life savings when they were just ready to retire . Total devastation..I work with an 80 year old man that is still shuffling in and punching a time clock because of it .

Aaron K. · Answer

@David De Luna that is okay, but you are counting appreciation for your stocks, so it is not apples to apples. Also once the property is purchased your mortgage pay down is essentially guaranteed because there is no way to discharge the debt aside from paying it down or selling the property, so as long as you keep paying it down your net worth will increase by x amount per month and you can eventually sell the property to recapture that, just as you would have to sell a stock to realize the full gain.

David de Luna · Answer

@Aaron K. thanks for the feedback. Yes, I know that I'm leaving off the appreciation and equity increase. For a quick analysis of properties, I look at it this way: If I'm getting 12% on my money at Fidelity but can get 12% COCROI on a multifamily, I ignore appreciation, mort pay down in my quick analysis. I think of those items as additional pluses for my added risk investing in real estate. Since this is a retirement plan and I am only a buy/hold investor - cash flow is the all-important consideration. Thank you for your counsel. I appreciate it.

What's really important in analysis?

What's really important in analysis?

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