#16: Rental Property Metrics Paralysis Colorado Springs Real Estate Investing Podcast

Don’t Analyze Yourself Out of a Good Investment!







Purpose







* As an investor, it is important to have guidelines and parameters to base your investment decisions on. We often see investors focus on Cap Rate and Purchase Price.* However, which guidelines and/or metrics you choose to focus on could cause you to lose out on good deals if you don’t look at the deal from a multitude of different angles.* This episode will show a few hang-ups investors face, and why narrowly focusing on a single metric could end up causing thousands of dollars in opportunity costs.









Three Learning Options! * Listen to the podcast "#16: Rental Property Metrics Paralysis" on the Colorado Springs Real Estate Investing Podcast* Watch the YouTube video (at the bottom.) * Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.







Cap Rate







“I don’t want the property if it’s not at least a 6 cap.”







* Assuming we are using debt, let’s consider, how do you calculate Cap Rate?* Cap Rate = Net Operating Income (NOI) / Purchase Price* NOI (and therefore Cap Rate) does NOT account for mortgage interest costs* i.e. if 2 identical assets have the same purchase price and NOI, then asset #1 with a mortgage interest rate of 3% and asset #2 with a mortgage interest rate of 5% have the same cap rate.* Something to consider, is that Interest rates have been steadily decreasing over the past year; as prices of assets have been steadily increasing over the past year.* When prices increase and NOI does not increase at the same rate, cap rates decrease (or compresses), which at its surface looks like a bad deal.* Cap Rate is only capturing one part of that change, the increased price of assets.  It is NOT considering the decreased interest rate’s impact.































* Case Study:* I own two identical properties across the street from each other.  I also refinanced them both almost exactly one year apart from each other. I refinanced Property #1 in late September, 2019 and refinanced Property #2 on October 1, 2020.* For this analysis, let’s pretend we bought each property at their respective stated dates for the price listed.* All other NOI factors remain constant except for purchase price and rent price, with the purchase price (25%) increasing at a higher rate than rent price (8%).* This is a good comparison with both real interest rates and real appraised values to compare cap rate and interest rate effects.







Property #1























Property #2























Let's Compare







Only looking at Cap Rate, this is what you probably are thinking…























Now, let’s look at the whole picture:















Even if we took out appreciation and looked just at certain or “more-certain” returns (cash flow, debt paydown, depreciation), it is a difference in ~$1,000 favoring Property #2’s numbers.  The only decreased ROI factor is cash flow, but a very marginal amount.  The debt paydown is higher, because the interest rate is lower (more going to principal each month), and the depreciation is higher due to the asset purchase price being higher.















Purchase Price







“I don’t want to pay anything above list price.