All Forum Posts by: Stephen Sawrie

@Shawn Devoid thanks man.  that's awesome.  another arrow in the quiver.  i like these calculators once i fully get my mind wrapped around the actual calculations.  

@Account Closed looks like i owe you the full six pack.  thanks for hanging in there with me!

i very much enjoy the numbers, and this thread has helped me tremendously

@Mike Dymski yes it does help a great deal.  and if you will backchannel me your address i will send you a couple of our best local beers.  since you have hung in this long, however, i was hoping to get just a bit more from you....maybe round it up to a six pack.

the ROE description makes perfect sense.  i understand fully what you mean.  but what i noticed is that the ROE jumped from a very good 26% by my calc to an astounding 44% by your calc.  i am assuming that you think that on paper, and strictly be these numbers, that 44% yr 1 ROE reflects a good deal ?

COC - agreed about its use for a stable prop in a 30 yr mortgage. but in a situation like mine (quick payoff) or one in which you put a lot of money into repair, do you agree that it becomes less useful in acquisition decision making?

can you please elaborate on the 5% return on paying down debt?  that is an intriguing comment and i do not fully understand it.

thanks in advance.

@Igor Messano excellent point about covering depreciation. i do have a CPA...will run that one up the flag pole as i continue to iron out my strategies.  in my example below, how does my equity and annual cash flow look with regard to your point about depreciation?

@Mike Dymski  outstanding!  you win. ROE is exactly the metric i am looking for as an acquisition metric, i think.  just to be clear, ROE = gross income - operating expenses) / (property value - loan balance) = NOI/equity?  and once the loan is fully paid, it becomes unleveraged ROE = cap rate?  and elaborate on the terminology police for those of us who do this only part time.  anyway, many thanks.

so to make sure i am clear, below is a spreadsheet of one of my properties.  i have not taken into account capex or vacancy for purposes of this discussion.

Cap rate = ($9000-$2660)/$43,000 = 14.74% (good)

COC = $1235/$17,400 = 7.1% (bad)

annualized total return (yr 1) = $3032/$17,400 =17.43% (respectable)

but ROE = ($9000-$2660) / ($50,125-$26,416) = 26.74% (outstanding)

So using ROE foy my strategy suggests that this is a very good buy, correct @Mike Dymski ? and then check out the COC in year 7, which is the timing for when i want my properties to fully cash flow. this is my thinking @Jeff B.

i still don't see how to calculate IRR as an acquistion measure

Jeff B. It's not big deal, I have my mind around it now. But the bottom line is that my model is one that discounts cash flow completely (other than negative cash flow) at the expense of aggressively paying off a note. I want my properties cash flowing at maximum potential in seven years after the note is fully paid off. During that time, any metric that uses financing in it's calculation will be skewed. For instance, cash on cash is nearly useless. It would be the same problem if you purchased a house and put a large sum of money into it. Total profit and annualized return might look awesome, but cash on cash would look abysmal.

@Rick Pozos "Bottom line, all properties have to cash flow, even if you dont use the cash flow for current expenses, because if they dont, they will never get paid off. And I think you are looking to pay them off quick."  That doesn't make sense.  Cash flow takes into account the mortgage payment as well as all other expenses.  If your cash flow is zero, you are not pocketing anything, but your note is getting paid off.  If I was interested in positive cash flow now, I would lengthen the terms of the note.  I settled on 7 years because my note will be paid off as early as possible with no additional cash out of my pocket.  Anyway, i think we are just sideways on semantics.

@Account Closed yeah, i hear and read IRR all the time. but taken straight from this website, it involves taking into account "sums of money going in and coming out through the life of the investment," and accounting for "the amount of time an investment is held." Talk about needing a crystal ball. I am about to think that IRR is one of those things that the pros throw out there just to mess with us part time guys. If it is the single greatest metric out there, why is it not part of the rental property calculator offered on this site? or if it is, i guess i am just not smart enough to see it.

bottom line, and keeping it simple...if i put minimal cash into a reasonable property that someone else pays off in 7-8 years and do this over and over, i don't see how that can go wrong.  therefore, i still don't see why cap rate is not useful in evaluating deals independent of financing.

as always, thanks in advance for any input.

@Rick Pozos and @Jeff B. Thanks for the input. So knowing that cash flow on the properties is not important to me during the life of the loan (except to the extent that they would negatively cash flow), it seems that some of the typical metrics used to analyze a deal become less useful. My question still stands....in the "after-tax" LLC model outlined in my original post, is cap rate the best way to analyze my deals and compare them (apples to apples)? any other metrics out there that may be more useful? obviously the metrics that take into account the mortgage will look pitiful during the life of the loan. Hope this makes sense.

thanks

but i don't work for nothing. i am a full time physician and just don't care about the cash flow for the next few years.  but when my daughter starts college in 7 years....see where i am heading?

so i am 7 properties into this RE thingy, and have been leaning heavily upon a seasoned mentor throughout.  however, as i try to wrap my mind around the metrics of analyzing a deal, it seems that, well, the "go to metric" sort of depends on the situation.

i have two LLCs. the first holds IRA money and is self-directed, and currently owns four properties that were purchased with cash. seems that the best metric here is the cap rate? i realize that this is used a lot in commercial properties, but it appears to be the best metric to analyze and compare deals when financing is not a variable. thoughts?

the second is my "after-tax" LLC, and i have currently purchased three properties and am about to finance them all into one loan with my newly minted portfolio manager. they are all much like the properties purchased in the first LLC...35-45K, foreclosures, each needs 0-5K basic rehab, and each rents for 750-800/month. in this instance, however, my plan is to pick up 2-3 at a time with a LOC and then bundle and finance. so my first three properties total 139K after rehab, and i plan on taking 110K out and putting that back towards LOC, so I will have 29K of my own money in once i fully zero out the LOC. While I have read about the wonders of cash flow with multiple properties all financed around 70% LTV, I don't really care about cash flow for the next 5-10 years with the exception of not wanting to be negative. But after that period I want my properties to be cash flowing at their full potential, which to me means having the note paid off. my "sweet spot" for financing comes in at 7-8 years in which my cash flow will essentially be zero after taking into acct taxes, ins, capex, vacancy, property mgmt, etc. In this scenario the CoC return and cash flow metrics really suck for the life of the loan because of the aggressive repayment schedule, but again, i don't care about these metrics as long as i don't negatively cash flow during that period. so once again it seems that the best metric in the initial deal analysis is the cap rate?

so bottom line...when using the BP rental property calculator or my own (admittedly more crude) spreadsheet, it seems as if CoC and cash flow do not have to be the holy grail depending on circumstances and goals. where have i gone wrong?

i checked out brandon hall's blog linked by @James Masotti and was disappointed to read that research on properties was not considered material participation.  @Jim Kennedy, are you willing to elaborate on the "64 things" you referred to in your earlier post?