patrick.net

Hi folks,

There are several different ways to approach the ROI for an investment property. Many look at the capitalization rate which is the (yearly rental income after expenses) / (total value of the property). However, for a small scale investor like myself who isn't purchasing all in cash, it's more interesting to identify ROI based on the equity or amount I'm investing up front, therefore capitalization rate loses some of it's meaning to me. I don't care what the return is when compared to the purchase price since I didn't put up the full purchase price to acquire the property.

If I am to look at the ROI of my investment property after 1 year, I need to take into account the total amount I've invested in that year (down payment, mortgage payment for the year and all associated expenses for that year) and compare it to the effective rental income. I.e. divide the effective rental income by everything I have invested during that year. Isn't that my true ROI (ignoring any appreciation or depreciation of the property)?

I'm wondering if any of you are willing to share your spreadsheet analysis on how you calculate ROI and why you use the method that you do. I have attached mine. But again, this uses capitalization rates and net returns based on the purchase price.

I'm more interested in the ROI based on the amount invested upfront. In other words:

(Net Cash Flow from rent) / (down payment + finance payment + all expenses)

And lastly for the long time investors, what ROI meets your criteria for pulling the trigger on a property?

https://docs.google.com/spreadsheet/ccc?key=0AqeJiYMCktN-dC0zcFppdFYxVnd0cWFVTlJnZ0RkMmc#gid=0

#housing