Understanding the Different Returns & How/When to Use Them

[Leslie Hsia]

I'd like to understand when and how different values of return should be utilized and interpreted. After much reading, I have come up with the following (excluding COC and Cap Rate for this discussion, since I believe I have a relatively good handle on those):

1. Total ROI = [Net Profit] / [Total Investment Amount]

•  [Net Profit] = [Total Appreciation] + [Total Cash Flow] + [Total Loan Paydown]- [Closing Costs (at selling and buying)]

• [Total Investment Amount] = [Down Payment] + [Pre-rent holding costs] + [Improvements]

Notes: Doesn't account for time value of money, also not annualized

2. Annualized Total ROI = (1 + [Total ROI]) ^ (1/[Years Held]) - 1 (This takes the Total ROI value from item 1.)

Notes: Annualized, but doesn't account for time value of money

3. Internal Rate of Return = I won't bother writing out this equation, but I understand it to be setting the NPV = 0 and solving for the discount rate "r"

Notes: Accounts for time value of money; gives a sense of "true" returns

4. Return on Equity = [Total Annual Return] / [Equity]

• [Total Annual Return] = [Current Annual Cash Flow] + [This Year's Loan Paydown] + [This Year's Appreciation]
• [Equity] = [Total Investment Amount] + [Total Loan Paydown] + [Total Appreciation]

Notes: Shows your return relative to your "trapped" money

My questions are the following:

• 1. PRIOR to purchasing a rental property, which returns do you look at (aside from cash-on-cash return and cap rate) in order to compare a potential rental property to another one? Which return(s_ do you look at to compare a potential rental property to another asset class altogether (ie. stocks)? I ask because stock brokerages generally show Total ROI rather than any other returns (like IRR), so would it be more apples-to-apples to use Total ROI for comparison?
• 2. AFTER purchasing a rental property and renting it out for some number of years, which returns would you look at for the same types of comparisons above? (ie. which metric do you look at to determine if you should continue renting out your rental property vs just selling it based on a comparison with the stock market?)

Many thanks. I've got lots to learn...