How Do You Figure Out ROI on Rentals

The answer to this question can be as easy, or as difficult, as you want to make it. The answer is in many ways a function of your sophistication as real estate investor.

The thing to understand is that there can be what I call “static analysis” of ROI, and there can be time-sensitive analysis, which is infinitely more honest and precise.  Watch the video to find out more…

 

6 Comments

  • Trevor Reply

    Ben,

    Great video, I’ve had to watch it several times to follow….I guess my question is when it comes to “discounting”, taxes, inflation, and opportunity cost. All three would be an educated guess right? It seems all three are out of the investors control and it’s something to try and plan for when evaluating a particular property.

    Additionally, wouldn’t the future rental markets affect NPV? For example, the RE bubble bursts and nobody can buy a house driving up rents. This would defiantly affect your future cash flow.

    …now my brain hurts!

    V/R
    Trevor

    • Ben Reply

      Not really, Trevor. You sorta know what inflation is going to do. You should also know what the discount rate of other opportunities is applicable to you. If you don’t put money into this real estate, what are you going to do with it? Is it tracking S&P, bank CD, trading desk, other real estate – what is it? What’s your past track-record?

      As to the future, nobody has a crystal ball, but if you underwrite the averages, you should be as close as anyone…Makes sense?

      • Trevor Reply

        Ok, “underwriting the averages” that makes sense to me. Thanks!

        • Ben Reply

          That just gave me the idea for the next post, Trevor. Everyone starts by underwriting the asset. This is wrong. You start by underwriting that which you know to be “reasonable” for the asset, and then you go through each line-item and make adjustments either up or down based on the asset and what you think you can do with it… This is the key!

  • Sharon Tzib Reply

    Hey Ben! I thought one of the powerful features of performing the IRR before acquisition is that it can also help you plan the exit, as it takes into account your projected disposition in the project. True?

    • Ben Reply

      Sharon – considering that the final cash flow event is the distribution at the time of sale, it is impossible to figure out the IRR without that number – by definition. And, obviously, when modeling an investment, we must project some type of exit in order to uderwrite to the IRR. This is what makes IRR a much “truer” gauge of projected returns – exactly 🙂

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