How to compare returns + make critical investment choices

6 Replies

Team - I could use your help! I'm evaluating a number of different real-estate investment decisions and am trying to figure out what is the best indicator of returns that I should use to make "apples to apples" comparisons and prioritize my investment choices based on those returns. 

I'm currently doing some residential real estate work with a friend (buy/demo old homes, build new ones, sell them). I'm also looking at:

1)  A fund that buys residential mortgages

2) A fund that buys apartment buildings

3) A fund that buys mobile home parks

4) A condo in Mexico (for rental, not personal use)

5) Buying my own mobile home park

So do I use ROI? But then how do I account for the depreciation benefit that I would get if I purchased a mobile home park (this latter point is confusing to me, and the key driver of this post)? Do I use a measure that accounts for taxes, such as Cash Flow After Taxes? Should I look at CFAT/purchase price as a return measure of some sort?

Thanks in advance for your advice!

@Phil Carpenter

Short answer: You want to use a calculation that takes into account the time value of money, like IIR/MIRR or Capital Accumulation Comparison. 

Longerish answer: The question you're seeking to answer brings you into the realm of requiring some more advanced modeling to project cash flow, appreciation, tax benefits, and amortization. You have laid out drastically different investment vehicles with different capital requirements, time horizons, risk (both systemic and asymmetric), returns, tax treatments, time requirements, debt availability... ect

It looks like you have a bit of shiny object syndrome.  Come up with one or two filters that match up with your goals, which can narrow your options to 2-3 and then model those out extensively.

Hi Bill, and thanks for your response. While the house flipping I'm doing is more short-term oriented and opportunistic (unique opportunity to collaborate with a friend), with all of the others that I've mentioned here, my focus is on long-term results, and on beating the results I'd get by investing the money in equities (historical rate of return of 7%).

For all of these, I'm happy with a 10+ year investment timeframe.

So you're suggesting IRR/MIRR, which makes sense.

Team -- any other recommendations for the best indicator of returns that I should use to make "apples to apples" comparisons and prioritize my investment choices based on those returns? Thanks!

@Phil Carpenter No problem 

I just read read your first post and realize that I didn't answer your  original question. If you model after tax free cashflow flows for 5-10 years this will account for depreciation, however you'll need to account for deprecation recapture in the sale of the asset.

If you want a best guess for apples to apples use free cash flow projections in a Capital Accumulation Comparison. This will allow you to compare different time horizons and capital investments. You don't want to use IRR when you compare a fund's return to a MHP because they have different holding periods and capital requirements. You can get debt on a park which lowers your equity compared to a fund and you can also hold a park for 15 years no problem, but most funds close out after 5-10 years.

@Phil Carpenter . In addition to Bill's input, I want to add that since your tax situation is definitely unique and dependent on many factors (W2-income, marital status, ... tax brackets, other investments, carry-over from previous years, dependents, ... etc) it might be tricky for the forum to chime in properly. I would suggest you run some of the scenarios by your tax person as well and see how each of the investment benefits you/hurts you.  

Thanks to both of you, Bill and Henry. Am feeling like I will run some of these by a tax professional as a next step and appreciate your input.

before splitting hairs on depreciation and tax benefits decide what your skills and your "why". and, unlike me, weigh downside risk as likely. things go wrong all the time. any wisdom I have now comes from big mistakes. That said, a group of mobile home parks in the same area makes sense. I'm doing BRRRR but seller financing inside tax advantaged accounts rather than holding rentals.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here