Investor · Chicago, IL · Member since 2010 · 504 posts · 191 votes
9y
We look at cash on cash and ROI but not IRR or anything that has to do with appreciation that is market driven and not forced because we don't control the market but we do control the asset. The BP calcs are good about these projections so I would start there and if you want to tweak it then make your own based on those principles.
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
9y
Appreciation is not something to be ignored and just because it includes ALL profits and losses, even the ones you don't like or can't control, is no valid reason to not use IRR IMO ... just because you can't control it does not mean that it isn't important and should be ignored. Ignoring it and focusing only on metrics like cash on cash will tend to push you towards lower quality neighborhoods with weaker long term supply and demand fundamentals, yet better day one cash flow on paper. These neighborhoods tend to have zero appreciation at best and at worst negative appreciation after accounting for inflation, and you still don't control that but you sure as heck should care because you are then loosing purchasing power every year. That's not to mention the tenant headaches and fact that you would need to stack up 50+ cheap units each cash flowing a few hundred a month (which looks high on a percentage basis) to start to get meaningful cash flow going, which very quickly starts to resemble earned income from a job more than passive income from investment. Then CapEx will come along and eat your lunch in the long haul since all this time you were only budgeting 10% and didn't realize that it does not scale with gross rents and when the roof goes out it costs what it costs to replace; the roof does not know nor does it care what the unit is rented for.