Do you include principal paydown in return?

Question

Do you guys count principal pay down when calculating your return on investment?

Mike Dymski · Answer

Profit in real estate comes from cash flow, principal reduction, and appreciation/depreciation.  Ignore one or more and you can't properly benchmark investment alternatives and the return on your personal capital.  There are very profitable investment strategies where principal reduction and appreciation are the only components of profit.  IRR will capture all of the cash flows on a property.  There are lots of ways to tap into equity created through a refinance, sale, or exchange.  Lots of my way or the highway strategy bias on BP.

Kevin Coggins · Answer

@Karen W. Say you took out a 150k loan (20k down) and the house was worth 170k. 5 years later, you've paid 10k in principal, but that same house is now only worth 150k. You still owe 140k, but also still have 30k in the house, so you're at breakeven. Now, let's say your house lost 40% of it's value and need to get out, you go to sell and your house is worth 102k, you still owe 140k and already paid in 30k.

You're just counting something before it's actually realized, like my stock may be up 500%, but I own Enron stock and even though my cash paid and dividends received are $250k, I can still end up with $0 at the end of the day.

I'd still count it on my return though... as long as it's long term!

Jennifer Delmore · Answer

Yeah, but if the market falls enough it can still go *poof* and you can't get it back by selling the property.

Jennifer Delmore · Answer

As someone who is still upside down on a 2005 purchase (tenant pays the mortgage - eventually it'll be a cash cow LOL), it's absolutely unrealized appreciation until you sell the property.

Cesar S. · Answer

I feel it should be taken into account since it's a part of the return and for the most part you're not paying it the tenant is

Jesse Waters · Answer

Generally, I include principle pay down in my IRR.  I include it so I can get a better picture of where money is going as part of the big picture vs cash on cash.  Generally, I don't use it when evaluation a property prior to purchase, since I just want to determine if a property is a good deal or not I'll just look at P&I as an expence.

It doesn't go away if the market goes down, your equity position would just shrink.

Karen W. · Answer

@Jennifer Delmore sorry I’m really not getting it. How does it go poof? It’s cash paid. Appreciation I can definitely see that go away in a market crash but cash paid is cash paid. It’s not like the market crashes and your down payment is gone. It’s not like the stock market.

Karen W. · Answer

I get that it’s unrealized but I still don’t see how it’s the same as true unrealized appreciation. It’s not appreciation.  It’s cash versus invisible money.

@Jennifer Delmore

Karen W. · Answer

How would it disappear on a market turn? It’s not unrealized appreciation. It’s actual money.

Thomas S. · Answer

You do not count principal pay down unless you pull it out. As long as it only exists as equity you do not realise it till you sell and, obviously, it can disappear with a turn in the market. This is one reason you do not want to leave equity in a rental.

Do you include principal paydown in return?

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