Alternative to CoC ROI

[Jordan Ghasemi]

I recently took out short term loans to purchase a rental property (reasons why are for another post). One loan will be repaid in three years, and the other in five years.

The traditional CoC ROI doesn't seem to make sense when analyzing potential deals since the payments are very high and will be finished in a relatively short time.

What are some ways to analyze the deal both during the terms of the loan, and then once thew property is free and clear?

[Immanuel Sibero]

@Jordan Ghasemi

I agree with IRR being an alternative to CoC, in fact it is a much better alternative.

The four sources of return in rental real estate:

1- Cash flow
2- Loan paydown
3- Appreciation in value
4- Tax savings

- CoC (Cash on Cash) is a measure of net return generated by TWO sources (i.e. Cash flow and Loan paydown) on an annual basis

- IRR (Internal Rate of Return) can be used to measure the net return generated by ALL FOUR sources (i.e. Cashflow, Loan paydown, Appreciation, and Tax savings) throughout the life of the investment

- Cap Rate (Capitalization Rate) is a annual measure of how efficient a property generates NOI in relation to the property's cost/value. The problem with cap rate is NOI does not paint a complete picture of a property return (see the "four sources of rental real estate returns" above for a complete picture), so cap rate is a poor measure of return. Cap rate, however, is commonly used a measure of value/risk.

Cheers... Immanuel