so Smokeowna's post about Math help got me thinking. Do you track your return or are you happy just making some money?

The reason I am asking is I starting thinking about which properties are doing the best and which ones are not and it seemed to really depend on what kind of math you were doing. I was thinking along the lines of metrics to determine which rents need to be raised, or which houses might be the low performers.

So a free and clear house seems easy to figure but there really are a lot of variables and how you are defining them.

ROI = (gross rent - expenses) / cost of the investment

Gross rent is straight forward and all expenses is straight forward. Cost of the investment should probably be cost plus closing costs plus and renovation costs.

Do you ever figure back in appreciation. You paid 100K but the house is worth 200K so your ROI is really higher (after years of course or maybe after reno - you paid a 100K but you renoed for 20K and the value is 150K but that isn't your cost which is 120K)

So maybe it should be

(gross rent - expenses + appreciation) / cost of investment

ROI returns higher numbers if you finance the properties. If you only put down 20% then your ROI numbers look great but it doesn't really figure in your cost of financing does it?

Depreciation isn't figured in and I would assume that would make the returns look even better.

Over thinking I know . . . .

To truly calculate ROI as a fixed number, one would have to wait until sale of the asset to lock in a firm number. Both depreciation and amortization could be meaningless depending on changes in tax laws, the time of the sale, and the sale price of the asset.

I base my investment decisions on free cash flow. What profits am I taking home each month vs. how much have I got invested?

Also, how many LL's are DIYers? Do they pay themselves for management, cleaning, being Mr. Fix-it? Those would be real expenses used by anyone doing a legitimate investment analysis vs. a Mom 'n Pop hobbyist.

I "pay" myself a 10% management fee every month and a $40 service call fee each time I have to go to a property for something non-management. It helps keep the final results a bit more accurate in terms of truly passive income. Sometimes I simply leave the $ in the bank, but it shows up in my calculations under "Unpaid Labor."

Percentages are like statistic: too easy to manipulate. Let's say you've got $20,000 of your cash in a deal making 20% yearly cash on cash ($4,000). Is that better or worse than a deal where you have no cash (100% financed) and you earn an Infinite % cash on cash but only pocketed $50?

My one thought centers around paying off which properties when.

Do I pay off the big one-- 50K thats renting for 900.00 or pay off 2 at 35K and 30K and bringing in 800.00 each? Number one is worth 125K the other 2 are 60K each. Now you have to calculate the true return-- because all that cash flow needs to have T&I considered and the cost of maintenance.

I've tried to narrow down my selection by asking-- do I want one free and clear asset--- or two? (2 is the winner for me)

How far into the loan am I-- is principal pay off more then interest at this point of the loan?

I don't do ROI. I own the houses, the rent comes in. There isn't really any place else to put the money at the same level of risk that returns the same profit.

I'm with Woodsmoke. Where ELSE would you put the money? Our places all bring in about the same amount of money per unit. We do have cheaper studios but otherwise our places all rent from $1000-$1200. Can't go any higher - not enough qualifying applicants to begin with. Studios are $700, give or take, but they are tiny, so only tenant per unit. So they are hard to qualify for, too!

I'm afraid I had no mentors. I picked up the rules after I was well along in my career.

This is why this whole subject is Greek to me. These are example of how I think

" Buy a property for 70 times rent".

" A fifty thousand dollar house should rent for $500 or more".

"Never repair a house better than 90%" (This is subjective and simply reminds us to beware. It means do your very best and don't feel bad if a flaw is found in your work).

I can't tell you a single ROI of anything I own. I'm absolutely clueless.

Whereas, I can tell you how much it costs me to drive a mile, that when I last counted it cost 2.40 to cut a lawn. I'm the person you want to ask about the bookkeeping when it is tax time but not the one to speak in front of your investors.

I spent over 50 hours learning how to avoid long term capital gains tax. Many ways..... So many learn how to buy property. Fix it up and rent it out. Then they sell it paying:

6% sales commission

2% closing fees, escrow cost and transfer tax

20% Long Term Capital Gains Tax

4 to 13.3% State Tax

3+% Affordable Care Tax

Government is your partner when you pay all of the taxes....

I don't worry about appreciation. I live in a poor, rural, isolated, stagnant market.

I buy a sad house, usually from anywhere between $500-$10,000. Then I put in a ton of work-- anywhere from $10k-$40k. So usually, I have between $20-$40k in my house at the end of the day, depending on how much is hired out, and whether any major systems needed replacing.

Then I rent it, generally for about $5k-$7k/year. Subtract taxes, subtract insurance, subtract repairs and turnover.

Then I use the remainder of that $5-$7k to help contribute towards the costs of renovating the next house... and the next house... and the next house. The current goal is to get 30 of them, each bringing in $5-$7k/year... I'm eight years in, and I've got 18 working. (Should have been 19, but I've lost one to fire.) Some years, I don't buy anything, and other years, I'll buy three or four. Right now, I can generally get about two (almost three) renovated in a year, working at the pace of my cash.

I could buy in an area that's more economically stable, but I like being Present. It's the area I know, and it's where I have my eyes and ears.

I could have investments that are just numbers on paper, but I got into RE because I liked the control. If something bad happens, it's usually traceable to my decision-making process, not some anonymous person.

And I certainly couldn't be a flipper in my market-- it would make no sense to be all-in $40k on a place and turn around and sell it for $60k.

But I don't analyze it very closely. I'm content with converting $20k into a form that generates about $5k/year in 2013, 2014, 2015, 2016... I've made my $20k back, and enjoy what it does for me in 2017, 2018, 2019... Maybe by the time I get to 2040, my little town will be a shadow of its former self, but I don't have any control over that. But in the meantime, I enjoy grossing back my initial investment every three, four, five, six years... times 30...

Here's a real-life example:

House was purchased & rehabbed for 40K all in, cash. Currently rents for $1000/month and nets $7K/yr. That's a 17.5% rate of return. Not bad, but there's the hassle factor.

I use a cap rate. It’s simlple and works on apartment or houses.