I don't understand $ per door instead of % return

5 Replies

I often hear investors refer to netting X dollars per door.  That makes no sense to me.  $200 per door per month might be great if you have 10K invested, but terrible if you have $100K invested.  Why does $ per door have any relevance at all?

It depends on how the deal is structured. If you are close to 100% financed on the deal then $200 per door after all expenses are paid is pretty darn good. 

Example:

$100,000 SFR financed 100%

$1500 gross rent

$750 NOI (assuming %50 rule)

$535 mortgage payment

$215 net cashflow

That same property if owned free and clear would net $750 after applying the 50% rule because you would have no mortgage expense.

I prefer to analyze things on a % based return.

It matters because just as in your example $200/door for a 100K investment isn't good, neither is a 12% return on $5,000 which is only $50/mo. That IMO is not worth the necessary work required of managing a rental...or PM whichever the case. 

They are two separate metrics that paint a different perspective on the same picture and then you can make a better decision.

Updated over 3 years ago

I don't mean to say a 12% return is not good on a 5K investment, but in the context of a rental it's not substantial enough absolute return ($50) to justify the risk and management required for it.

% return is a number in terms of today while cashflow is number in terms of the future.

$ per door is a good metric when looking longterm on the cashflow side of the deal. If I am financing a property, having somone else payoff that loan, cover all the expenses AND still get $200/month in my pocket - I am pretty happy. You have to look at it long term, eventually that loan will be paid off and the amount you recieve extra per door will be a good indicator how much you recieve when the asset is paid for.

There is no one perfect metric to evaluate a deal. $ per door is just one example of a quick measurement to compare deals. It is not an either or evaluation. You should use many criteria to evaluate your deals. 

Using our own example what if the $10K bought you one door but the $100K bought you a small apartment with 15 doors. Now that $200 per door has relavance.

Medium crab1 copyNed Carey, Crab Properties LLC | http://baltimorerealestateinvestingblog.com/

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