All Forum Posts by: Ross Hayes

Thanks, Jake! Appreciate your guidance. When you look at Return on Equity, are you simply dividing your annual cash flow into the equity that you have in the property?

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Quote from @KC Pake:

Quote from @Ross Hayes:

Quote from @KC Pake:

Quote from @Ross Hayes:

Hello

First time poster...

We purchased our first investment property a year ago, and we are working to prepare to purchase our second. I'm trying to educate myself better on the analysis to analyze deal, as well as key metrics to monitor performance of a property once you own it. We feel like we made a good purchase on the property last year, but with rates higher and prices inflated, I want to make sure our analysis is very tight.

1) What key metrics do you recommend to analyze a potential deal, as well as after a deal is made?

2) For our existing property, how do you calculate return on investment? How does mortgage payments (interest and/or principal) impact any analysis?

Our interest and focus in long term holds of residential rental properties. Beyond ensuring that they cash flow, we are most interested in validating that the return on our cash put into a deal is yielding a good return, as well as overall return on the deal.

Thanks in advance!

Ross

Hello Ross,

Congratulations on your first investment property and on preparing for your second! Here are some insights to your questions:

Key Metrics for Analyzing Real Estate Deals:

Net Operating Income (NOI): This is your total income from the property minus operating expenses (excluding mortgage payments). It's a crucial metric for understanding the property's profitability.

Cash Flow: This is the net income after all expenses, including mortgage payments. Positive cash flow indicates that the property is generating more income than expenses.

Capitalization Rate (Cap Rate): This is used to estimate the investor's potential return on investment. It's calculated by dividing the NOI by the current market value of the property.

Cash on Cash Return: This measures the return on the actual cash invested. It's calculated by dividing the annual pre-tax cash flow by the total cash invested.

Internal Rate of Return (IRR): A more complex metric, IRR calculates the profitability of potential investments over time, taking into account the time value of money.
Calculating Return on Investment (ROI) and Impact of Mortgage Payments:

ROI Calculation: ROI is typically calculated by dividing the net profit of the investment by the total amount of money invested. For a rental property, your net profit would be your income from the property minus expenses, including mortgage payments.

Mortgage Payments: The principal portion of your mortgage payment is a reduction of liability (your loan balance), while the interest portion is an expense. The principal payment increases your equity in the property but does not affect your cash flow, whereas interest is an expense that reduces your net income and thus impacts your ROI.

For long-term residential rental properties, focusing on cash flow and ROI is a good approach. However, also consider the appreciation potential, local market conditions, and your property's location, as these can significantly impact your investment's long-term success.

Remember, each property and market is unique, so these metrics might need to be adjusted based on your specific situation and investment goals. Consulting with a financial advisor or a real estate investment expert can also provide tailored advice for your situation.

Hope this helps - Best of luck with your investment journey!

Thanks, KC! Very helpful. A few follow up questions and clarifications:

On NOI, can you help me understand why mortgage payments would not be included? As I think about money going out each month, the mortgage is the biggest "expense".

For ROI, when you say "total amount of money invested", does this include cash down, cash put into updates/repairs, and also the mortgage amount? Or, does it only include actual cash out of pocket (i.e. money down at time of purchase plus any other expense for updates/repairs)?

So for calculating ROI on a rental property, the full mortgage payment (both interest and principal) is included in the expense?

Thanks again!

Ross,

I am glad the above information helped. Here is a little more detail on NOI and ROI...

NOI and Mortgage Payments: NOI is designed to measure the profitability of a property before financing and capital costs. This is why mortgage payments are not included in the NOI calculation. It focuses on the property's ability to generate income from operations, not how it's financed. NOI is calculated by subtracting operating expenses (such as maintenance, property management fees, taxes, insurance, and utilities) from the gross rental income. Since mortgage payments are a financing expense and not an operating expense, they are not included in NOI.

ROI and Components of Investment: When calculating ROI for rental properties, the "total amount of money invested" typically includes all the cash you have put into the property. This encompasses the cash down payment at the time of purchase, any money spent on updates and repairs, and other direct out-of-pocket expenses. However, the total mortgage amount is not usually included in this calculation. ROI is intended to give you an idea of the returns on the actual cash you have invested, rather than the total value of the property including borrowed funds.

Calculating ROI on Rental Property: For ROI calculation, you generally consider the net income the property generates (which is after deducting all operating expenses but before mortgage payments) and then compare this to your total investment (down payment, repairs, updates). It's important to differentiate between ROI and Cash Flow. While ROI gives you an annual rate of return on your investment, Cash Flow is the actual cash you earn each month after all expenses, including mortgage payments.

Thanks again, KC! Very helpful. I'm now building out my own dashboard using some of these metrics.

One last question - for Cap Rate, what is the difference in using the purchase price of the property versus the current market value of the property? Do you ever consider using both?

Thanks again.

Ross

0 Votes

Quote from @KC Pake:

Quote from @Ross Hayes:

Hello

First time poster...

1) What key metrics do you recommend to analyze a potential deal, as well as after a deal is made?

2) For our existing property, how do you calculate return on investment? How does mortgage payments (interest and/or principal) impact any analysis?

Thanks in advance!

Ross

Thanks, KC! Very helpful. A few follow up questions and clarifications:

On NOI, can you help me understand why mortgage payments would not be included? As I think about money going out each month, the mortgage is the biggest "expense".

So for calculating ROI on a rental property, the full mortgage payment (both interest and principal) is included in the expense?

Thanks again!

0 Votes

Hello

Came across BP on YouTube, and just now diving into the community. We have one rental property today, a single family, that has gone well. We are looking to prepare to acquire a second property to begin growing our portfolio. Looking forward to deepening my education and ability to tightening up financial analysis.

Thanks!

Ross

1 Vote

Hello

First time poster...

1) What key metrics do you recommend to analyze a potential deal, as well as after a deal is made?

2) For our existing property, how do you calculate return on investment? How does mortgage payments (interest and/or principal) impact any analysis?

Thanks in advance!

Ross

0 Votes

All Forum Posts by: Ross Hayes

Ross Hayes has started 9 posts and replied 25 times.

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