Real Estate Property - Return on Investment

It's one thing to know that your rental property is or will be cash flow positive.  Its an entirely other thing to be able to know your rate of return or return on investment for your rental property.  

There is a reason that when people look at quickly evaluating real estate property, they usually use something like their cash on cash return.  Its something that can be estimated and calculated on the back of a napkin (probably better in an excel spreadsheet).  It can be an accurate comparison when determining which mutually exclusive real estate investment will yield the better return on your cash invested.  This metric is only useful and accurate for year 1 calculations.  This is because time value of money must be calculated in order to determine an accurate return on investment in future years and this is a little more complicated than dividing 2 numbers.  

Let's be honest, if one property has a higher cash on cash return in year 1, then its probably going to have a higher cash on cash return in year 2 and beyond making it he better choice between two properties.  

But what if it wasn't the better property investment? 

What if you happen to believe that a property with a lower cash on cash return in year 1, will provide better long term returns than a property with a higher year 1 cash on cash return?  

What would make this a possibility?   

First, one property could be located in a neighborhood that you believe will appreciate much faster than another.  Perhaps you know that it is only a matter of time before the neighborhood gentrifies and real estate values quickly rise.  Appreciation of your property would usually coincide with a rise in rental rates that you can charge your tenants.  

So now you are not only gaining a better return via higher rental rates, less vacancy, and better tenants(meaning less repairs and maintenance expenses), but your property value is increasing more giving a better return when you choose to sell the property.  

Essentially, you have a situation where your cash flows from your investment will be more weighted towards the future than the present.  This makes the year 1 cash on cash rate of return impossible to use to evaluate two investments.  

That's where the modern technology of the real estate investment calculator comes in.  There are a lot of real estate investment calculators out there and most of them are free!  But you want to use one that allows you to project rates of return in the future accounting for the time value of money.   Not to be technical but this calculation is called an internal rate of return calculation.  

If you know and understand how net present value of future cash flows work, then you may also want to apply a discount rate your cash flows to calculate an NPV.  

One other nuance to a real estate calculator should be depreciation.  Can you choose between residential and commercial real estate depreciation?  

There is only one FREE real estate calculator that calculates everything that is mentioned here.  It projects out 30 years into the future and lets you project/estimate your property appreciation rate and a rental appreciation rate in order to weight your cash flows more in the future than the present.   And based on these cash flows and the future value of your investment,  it calculates an internal rate of return for you.  

Be sure to check out our real estate investment calculator.  It might just change your decision making process.  

https://iqcalculators.com/calculator/real-estate