Key investment ratios and their relationship to one another

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Key investment ratios and their relationship to one another

Lorenz Cornelis
Zurich, Switzerland · Member since 2017 · 8 posts · 1 vote

Hi All!

I am currently setting up my investment dashboard to track my portfolio's performance (buy-and-hold) but am also looking into better understanding the underlying dynamics between the various return metrics. My question has two components:

Part One: Which metrics to include in the executive output:

The current shortlist/ratio's that will make it on my "executive output" are:

  1. Capitalization ratio
  2. Cash-on-Cash ratio
  3. Return on equity (incl. loan paydown, cashflow and appreciation)
  4. Debt servicing ratio

Is there any metric I am forgetting here to get a first good impression of the property? Any suggestions?

Part Two: Underlying dynamics:

I am trying to better understand the various effects between our "selection". For example: a high cash-on-cash ratio is usually good news. However, it could also be that the property is "underlevered" and therefore has a lower overall return on equity (+ the opportunity cost of only being able to acquire one property). Another example could be a high debt servicing ratio (e.g. close to 100%) which could mean that your rental income is too low OR you have a short-term loan (which then again affects your return on equity from loan paydown and risk profile).

Do you have any further points or ideas? I would love to hear about it!

Warm regards from Switzerland,

Lorenz

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
5y

You're over complicating it all by overanalyzing with the use of useless numbers.

Focus on numbers with $$$$ in front, and don't use numbers with %%%% behind them.  Percentages tell you nothing of true value, and they will lie to you in the process.

Also, paying off a mortgage using your own money (cash) is foolish and counterproductive. In simple terms, the entire cost to the REI is only what cash that comes out of their pockets. The rest comes from the tenant (rent) as long as you have positive Cash Flow. Profits come after you have recovered ALL of your cost, so the less that comes out of your pocket, the less the property cost you, and the quicker you get to making a profit.

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    5y

    You're over complicating it all by overanalyzing with the use of useless numbers.

    Focus on numbers with $$$$ in front, and don't use numbers with %%%% behind them.  Percentages tell you nothing of true value, and they will lie to you in the process.

    Also, paying off a mortgage using your own money (cash) is foolish and counterproductive. In simple terms, the entire cost to the REI is only what cash that comes out of their pockets. The rest comes from the tenant (rent) as long as you have positive Cash Flow. Profits come after you have recovered ALL of your cost, so the less that comes out of your pocket, the less the property cost you, and the quicker you get to making a profit.

    1Reply
  • Lorenz Cornelis
    OP
    Zurich, Switzerland · Member since 2017 · 8 posts · 1 vote
    5y

    Hi Joe,

    Thank you for your reply. To be honest, I do not fully agree that % do not tell you anything. It is a direct indicator of performance and creates a relationship within the portfolio in order for the investor to better grasp the relative impact of a decision. 

    Regarding your second point, I want to mention that the scenario is ofcourse based on a "rental-model/buy-and-hold". So the question is more how the different ratios (or $$$$) react to each other to properly estimate a return. The cash/loan balance then is determined as a direct result of it! Maybe as a sidenote the minimum debt/equity ratio also varies widely from country to country. The European banks are traditionally a bit more "conservative" so we do have build up a solid investment case to maximize leverage.

    0Reply
  • Scott M.
    Real Estate Broker · Rochester Hills, MI · Member since 2009 · 2k+ posts · 2k+ votes
    5y

    By any chance are you an engineer in your day job? 

    1Reply
  • Jai Reddy
    Edmond, OK · Member since 2012 · 456 posts · 270 votes
    5y

    @Scott M.

    Respectfully, aren’t the Swiss amazing watch makers? Details down to the last second!

    0Reply
  • Lorenz Cornelis
    OP
    Zurich, Switzerland · Member since 2017 · 8 posts · 1 vote
    5y

    @Scott M. Hi Scott! 

    I am working as a financial consultant in Zurich. Crunching numbers, building up models,... are part of the job. But unfortunately no technical background! 

    0Reply
  • Lorenz Cornelis
    OP
    Zurich, Switzerland · Member since 2017 · 8 posts · 1 vote
    5y

    @Jai Reddy They absolutely are and it is also strongly solidified within the Swiss culture (also an entire subcategory of hunting for lesser known but high-quality brands). I can really recommend a visit if you love watches! 

    1Reply
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