@Ron Vered, Equity build-up is valid to look at if you want to compare owning real estate vs. other investments. However, I think you need to be careful about not confusing it with appreciation. You wrote:
Appreciation is different - that is what occurs when a $150K house rises to $160K. When we speak about equity build, that refers to factoring in your 120K debt shrinking as you own the home (thus there is real "cash" you are "earning" if you hold long enough).
Equity build is important - aside from tax benefit and appreciation, it's why you investing in a corporate bond at 4% is less appealing than in a home that yields 4% after debt service. You're also having that debt paid down, whereas in the bond you only have a return of capital.
I haven't found a great way of factoring tin equity build. However, for my calculations I look to see if the annual cash flow less 15 year mortgage payments break even as an initial test (as I am not looking for income right now). This tells me I'll get fairly quick equity build without anything out of pocket (someone else is taking my $120K loan for me an paying it down). Call this EAP (Earnings after Payments)
To dig a little deeper, I'll also subtract the cash I tied up ($150K is about $30K + any rehab or closing costs at time of purchase) and apply a "cost of cash" (what is my opportunity cost of that investment in a fairly safe instrument), along with any EAP (can be positive or negative) and an estimate for my annual equity build (by estimating this from an amortization table).
To clarify:
Annual Benefit = Annual Equity Build + / - EAP - Cost of Cash
Note: This is not accurate / scientific / mathematically rigorous, and I'm not recommending it as a way to calculate returns. Once I have determined if something meets my CAP rate goals, I simply use this as interesting information for review as I compare it to other investments - but again, realizing it is false precision.
