All Forum Posts by: Craig T.

How do you think about the returns on your investments and what are your targets?

I look at my returns on this basis:

1. Cash on cash return. This is well-understood by most. I look at after-tax cash flow for a given year as a percentage of cash invested to purchase the property. I think of this as my “realized” return.

2. Principal paydown return. I’m not sure how other investors think about this. I look at the amount of loan principal paid down in an annual period as a percentage of cash invested to purchase the property. This is an “unrealized” return that can be realized upon refinancing. In order to realize this in the future, I assume the property value in the future will not increase (a conservative assumption over a long period of time in my markets historically). If rates increase in the future, it might cost me a higher interest rate upon refinance to realize this return, but I should be able to realize this. Clearly #1 above is more valuable to me than #2, so I give it more weighting.

3. Finally, I look at these two figures on a combined basis.

In my markets, for multi-family, I am targeting a high single digit cash on cash return and getting a mid-to-high teens “combined return”, as I think about it. I’m targeting properties that don’t have a need for improvements and are mostly optimized already. My returns include a professional property manager too.

How do others think about their returns and what are your current return targets?

@Jason Malabute

I have never used a cap rate to make a decision. I always know what it is, but it’s not a key metric for me.

Here is how I look at deals.

1. Cash on cash return (well understood by most). I look at after tax cash flow for a given year as a percentage of cash invested to purchase the property. I think of this as my “realized” return.

2. Principal paydown (not sure how others factor this in). I look at the amount of loan principal paid down in an annual period as a percentage of my cash invested at purchase. This is an “unrealized” return that can be realized upon refinancing. In order to realize this in the future, I assume the property value in the future will stay the same as at time of purchase and know that if rates go up, it might cost me an increased interest rate in order to “realize” this return. Clearly, #1 is more valuable than #2.

3. Finally, I look at these on a combined basis to understand my “total” return.

Maybe there is more official terminology for all of this, but this is how I think about new opportunities.

@Tim Rainey

Yes, we are in an asset bubble (see the stock market) driven by near-zero interest rates. With that said, it doesn’t mean you can’t find deals that make sense in this market. Best way to play things in mind my is to remain a consistent investor through all cycles (good and bad).

@Abdullah Rubiyath

I did this with no issue recently with a business loan on a property. Needed to modify the purchase agreement, but it wasn’t an issue with the buyer as it didn’t delay close. I needed to verify that I had the cash for an all-cash purchase at the time the offer was accepted, which I did in a combo of cash, liquid stocks, etc. (similar to you).