Account for equity when paying down loans

[Sean Mills]

I am planning to purchase my first rental property this coming winter using conventional financing. While I save for a downpayment I have been analyzing properties for practice. When looking at properties and the return they will generate, should I account for rent paying down the mortgage and building my equity in the property while doing my analysis? Is this something that is just nice to know, or should I be factoring it to my decisions?

[Jon Holdman]

It depends.  If you're trying to figure out how much cash the property will put in your pocket each month, then no.  An old saw for real estate is "you can't eat equity".

If you're trying to figure out the full value of your investment, then, yes, include the "principal paydown" in your calculation.  On commercial deals, the resulting return, including principal paydown is called "total return".