When to begin ROI Calculations from Primary Residence to Rental

2 Replies

Hello BP!

I'm in the process of determining the best course of action on my rental property, but to make the most informed decision I need to know how/when to calculate my ROI, Cash on Cash Return, etc. I am utilizing Frank Gallinelli’s What Every Real Estate Investor Needs to Know About Cash Flow... And 36 Other Key Financial Measures” GREAT book, especially for the math challenged like myself.

However I'm struggling with the start point of doing the math.  I don't want to inadvertently skew the numbers.

As background, my rental property was originally my primary residence. I bought at the peak in 2006, immediately became underwater on my mortgage with the rest of America after the crash. I was assigned overseas in 2012, so refinanced my house before I left, and ultimately converted it into a rental property, figuring, naively, as long as the rental payment was larger than my mortgage payment I was good to go!

So when doing the math…Do I consider the original 2006 down payment costs and years of primary residence as part of the calculus on current ROI/ Cash on Cash return, etc…or ONLY the numbers associated with the REFI in 2012 when I converted the primary residence to rental property?

I can provide the actual numbers, but think the fundamental question doesn't require the actual numbers..if i'm wrong i will provide the numbers ASAP.   

I anticipate providing all the numbers under another topic as i am currently barely breaking even on rental payments to mortgage payments and am deciding what to do with my rental property to potentially make a silk purse out of this sow’s ear.

Thanks in advance if you can help me with what i'm assuming is a pretty fundamental question.

David,

Your last line should be your biggest clue. "I am barely breaking even ...".

If you really want to see your ROI then it's all cash it put out divided by the investments made. It should then be annualized.

So, yes you go all the way back to 2006 and include any refinance fees from the 2012 refi. Cash you took out in the refinance is put into the cash it put out category. You should also count any tax savings and put depreciation back in.

SFR as a rule don't cashflow worth a hill of beans (there are exceptions) so don't expect much. Mostly you will be dealing with appreciation. I would be looking at how to put the appreciation of the property to work for you.

I would also be concerned with current performance. If you can't get revenue up or costs down then it's may be time to look for another better investment. 

Good luck! 

Jim 

@James C., 

thank you for your insight and sorry in the delay in saying thank you!  Just FYI, I re-submitted this thread prior to your response, to another forum, feeling i might in the wrong forum. the link is: https://www.biggerpockets.com/forums/12/topics/498519-when-to-begin-rei-calculations-from-primary-residence-to-rental

I'm putting together my numbers and will hopefully post them in the other forum soon.  As you mentioned tho' I don't anticipate i can force any appreciation but costs are currently fairly low...(but i usually formulate for costs (even if unrealized) in my projections.

As far as the refi...i didn't take any cash out.  I was underwater and obtained a HARP loan to push the interest and monthly payment down (at that time the only math i conducted was to ensure average rent payments in the area would be larger than my mortgage payment. Real Estate Investing was EASY!!   : ) ).

thanks again,

David

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