Based on these numbers is this a good investment?

Question

I know these are very basic numbers but trust me, I have already factored in every possible variable and this is what it boils down to without writing a book. I have until 5pm tomorrow to decide.

$400k purchase price, $80k down payment, $1500/month profit minimum. Is this a decent return on investment or should I be getting a higher revenue on an $80k investment?

Tim Johnson · Answer

Every investment prop involves a stool with three legs: income, expenses, and finances.

Although every valuation or method of calculating ROI has its place...  I would argue that most investors will favor a calculation that includes as many of those stool legs as possible.

Some of my clients even like to use "price per square feet" or "price per unit" when looking at properties - but of course these methods don't consider income, expenses, OR financing. Gross Multiplier often shows up in an MLS listing - but it doesn't consider either expenses or financing.

Cap Rate is a great number and very helpful - especially for quickly comparing multiple properties on an even plane (apples for apples, oranges for oranges....) It can do this because it takes out that complicated variable of financing. But its very strength is also its biggest weakness.

And that's why so many investors use cash on cash as a helpful tool in their ROI toolkit - a simple calculation that takes into account income, expenses, and financing....

But hey, to each their own..... that's the beauty of this investment world -  so many possibilities and ways of thinking. Cheers....

Dell J. · Answer

All other factors and metrics aside,  a 22% CoC is a good return.  is it good for you?

Tim Johnson · Answer

If you've already factored in "every possible variable" and you're sure of your numbers, there's really nothing any of us can help you with. What a "decent return" means is completely different for each person and situation. What are your own criteria?

Account Closed · Answer

Sorry, just don't automatically buy the 1500/mo "profit". You're new, if you weren't you would be asking and/or wouldn't be asking using that language, so there a very good chance you are missing some things on that projection, most likely in the expenses category.

Nick C. · Answer

True your mortgage would affect the cash flow. I simplified to try to show cash on cash return isn't a good measure of a good deal. Let me try to say this another way - if you put 0% down everything you buy, even if the cash flow is $1/month, the return is infinity and therefore a great deal.

I'm sticking to cap rates and comps as better measures of deals.

Joe Villeneuve · Answer

All squares are rectangles, but not all rectangles are squares.

Nathan Gesner · Answer

$1,500 / month profit?

Can you break down how you calculate "profit" in your analysis? I see a lot of people assume "profit" is anything left over after paying the mortgage and that can be a fatal mistake.

Nick C. · Answer

You should base your return off your purchase price, which is the cap rate, that's a more accurate evaluator of an investment. So if you're making $1500 minimum per month after all your expenses, that's a 4.5% cap rate. ($1500 cash flow x 12 months) divided by $400k purchase price.

Using your out of pocket cash to calculate your return can be dangerous. In your example above you're taking $18,000 cash flow / $80k out of pocket on a $400k purchase = 22.5% return. Pretty good. Now let's say you bought the place for $1,000,000 but only came out of pocket $5k. That would be a 360% return and a much better deal. Gotta factor in the purchase price.

Keisha Haynes · Answer

Is this a good rate of return on 80k compared to other real estate investments you have seen?

Based on these numbers is this a good investment?

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