Rental Property Investor · Rancho Mirage, CA · Member since 2014 · 101 posts · 63 votes
Let's say your intentions are generally buy and hold, medium to long term and you aren't refinancing every 5 minutes to churn new deals...
What's would be your personal way of doing a broad stroke view of your performance and establishing a quick benchmark?
Do you tend to reference back to your original equity-in and cap rate at that time and use it in present time? Or do you consider your equity's market value and calculate with current cap rates benchmarks?
Hypothetically, say the equity in 2017 it was in at a million and you were expecting 8 percent, so 80K. But a few years later benchmark in your area and asset class is now more of a 7 cap and with no other big changes, you estimate your equity is worth 1.25 million, also for about a result of about 80K.
Now same question but fast forward year after year.
I suppose it's more interesting one way or another depending on whats on someone's mind, cash flow or appreciation.
But my hypothetical dismisses the leverage and strategy of cash-out re-fi.
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
6y
Using your assumptions, @Michael Klinger, I think the most important metric is Return On Equity (ROE). You want to make sure that your money is working as hard as possible. Of course, this is relative to other available investments (which is why we use metrics like IRR, DCF, and NPV when first evaluating deals).
So, if a few years later you have $1.25MM equity, but still only $80k in returns, you have a 6.4% ROE. Not great...unless the market has stalled or worse and it's only returning 3% at the time. In that case, may be a good time to keep your capital where it is...unless the downturn has created opportunities to buy new properties at 9% cap rate that had be selling for 5% cap rates. In that case, may be a very good idea to re-deploy some of that $1.25MM.
None of this happens in a vacuum, Michael. Context matters, a lot.
Lender · Chicago, IL · Member since 2016 · 653 posts · 313 votes
6y
@Jaysen Medhurst last sentence was very spicy, I like it and he's correct. Nothing happens in a Vacuum of controllable circumstances and context.
When analyzing investments the main metrics I look at are net pre tax cashflow and cash on cash return as well as the potential upside, while underwriting deals conservatively. There's no one way to look at anything, just a way that makes sense to you and allows you to take the most effective action. Don't get hung up on how to use all the perfect metrics, some combination of them will click and make sense to you for how you do deals.
Every investor is different in their thought process, desired end goal, and about hundreds of other criteria (: