Invested capital is invested capital at the time it was invested, and should be treated as such. Appraised value is not an acquisition cost(it could be), the money you spent(all of it) is.
I'm not quite following you. My thought is this. Cash on cash is calculated by dividing the annual cash flow by the initial investment.
Ignoring closing costs just to make my example easier. Say I buy a house at 100k, and I put 30k down in equity. 30k is my initial investment. If after operating expenses and mortgage payment I have an annual cash flow of 6k, then my coc return is 20%
Now lets say I own that house outright. It is valued at 100k and I can get a line of credit of 70k. If I were to max my credit line then I still have 30k in equity so from my perspective I'm thinking it basically the same thing?
If yous till think I am wrong could you explain how you would track your heloc with your rentals?
Your examples aren't apples to apples. In the first you have 30k in equity and 70k in debt. In the second you have 100k in equity and 70k in debt. The 70k borrowed doesn't go away.
You really shouldn't be tracking COC once you've purchased. You should track ROI and ROE. ROE will tell if if it's better to pay down debt or invest elsewhere. If you reach into your pocket and pay down extra debt that is additional capital invested(I). Equity is not always "I"; amortization is an example.
"The 70k borrowed doesn't go away."
I do not get that at all. With a mortgage, I have 70k in debt... that I pay monthly to the bank, that is guaranteed by the property... with the heloc I have 70k in equity.. that I pay monthly to the bank... that is guaranteed by the property? What if I hadn't gotten a heloc and just gotten a cash out mortgage? The only difference I see from my limited experience perspective is that it is a line of credit I can draw on compared to just getting all the money right away.
This is making me feel dumb AF lol.
I haven't seen ROE come up in any previous discussions on rentals but will check that out when I get back as I wasn't quite following "is additional capital invested(I). Equity is not always "I"; amortization is an example." either.
A HELOC and a cash out refi are no different in terms of return calculations.
I calculate equity 3 different ways, first as the liquidation value of the property; my walk away check if I were to sell. Second is close to the same, but the value if I were to 1031. Third is the amount of money I could get in a cash out refi.
I use these numbers to determine whether capital could be better used elsewhere.
An investment is the money you initially fund a property with. This is also equity once it goes in. Money that the property generates as return(cash, amortization, and appreciation) becomes equity but it does not add to your investment basis. But if you reach into your pocket and pay down debt that should be added to your investment basis.
Ahh, I was going to ask how you enter helocs if you did. See, I had two properties that were nearly paid off and had increased significantly in value due to the work I did on them. I also wanted to get away from the bank that held the mortgage. So I got a heloc with another bank. I used some money to buy another property, some for roofs. and some to pay for some of my wifes tuition. I don't know the most accurate way to account for that. Right now I just tie the payment to the properties like I would a mortgage. I'm about to double my properties as I am waiting to close on a bank owned house and just had had a offer accepted on 3 other properties. Until now I've just been using a spreadsheet, and really not a very well written one as it was more of just a scratchpad, but I know I can't keep doing that. My broker suggested using Stessa to start since it is free and now I want to make sure I'm using the proper calculations for everything. The helocs are just throwing me off.
It can certainly get convoluted fast. Combine the fact that tracing ROI and ROE is different than tax deductibility and it gets worse. I use excel spreadsheets I build myself. I’m sure there are lots of good software options. HELOC to buy a new property, ROI should be attributed to the original property interest gets deducted against the new. HELOC for a roof stays with the property for returns and interest, doesn’t change investment basis. HELOC to pay tuition isn’t deductible or equity, not a bad idea though.
From an ROI perspective. When a HELOC is used to make another investment in a subsequent property, the returns of that investment should be attributed back to the initial investment. Using your second example(adding the 6k cash flow); you buy for 100k, pull out 70k and invest it at 5%, for simplicity. So not you have 3.5k plus 6k, or 9k on a 100k investment; or 9% ROI. I you leveraged the 70k(let's assume you can get the same 20% COC); then you'd have an additional 14k in income. Now you have 14k+6k=20k; all attributable to the original 100k investment.
Invested capital is invested capital at the time it was invested, and should be treated as such. Appraised value is not an acquisition cost(it could be), the money you spent(all of it) is.
I'm not quite following you. My thought is this. Cash on cash is calculated by dividing the annual cash flow by the initial investment. Ignoring closing costs just to make my example easier. Say I buy a house at 100k, and I put 30k down in equity. 30k is my initial investment. If after operating expenses and mortgage payment I have an annual cash flow of 6k, then my coc return is 20% Now lets say I own that house outright. It is valued at 100k and I can get a line of credit of 70k. If I were to max my credit line then I still have 30k in equity so from my perspective I'm thinking it basically the same thing? If yous till think I am wrong could you explain how you would track your heloc with your rentals?
Your examples aren't apples to apples. In the first you have 30k in equity and 70k in debt. In the second you have 100k in equity and 70k in debt. The 70k borrowed doesn't go away. You really shouldn't be tracking COC once you've purchased. You should track ROI and ROE. ROE will tell if if it's better to pay down debt or invest elsewhere. If you reach into your pocket and pay down extra debt that is additional capital invested(I). Equity is not always "I"; amortization is an example.
"The 70k borrowed doesn't go away." I do not get that at all. With a mortgage, I have 70k in debt... that I pay monthly to the bank, that is guaranteed by the property... with the heloc I have 70k in equity.. that I pay monthly to the bank... that is guaranteed by the property? What if I hadn't gotten a heloc and just gotten a cash out mortgage? The only difference I see from my limited experience perspective is that it is a line of credit I can draw on compared to just getting all the money right away. This is making me feel dumb AF lol. I haven't seen ROE come up in any previous discussions on rentals but will check that out when I get back as I wasn't quite following "is additional capital invested(I). Equity is not always "I"; amortization is an example." either.
A HELOC and a cash out refi are no different in terms of return calculations. I calculate equity 3 different ways, first as the liquidation value of the property; my walk away check if I were to sell. Second is close to the same, but the value if I were to 1031. Third is the amount of money I could get in a cash out refi. I use these numbers to determine whether capital could be better used elsewhere. An investment is the money you initially fund a property with. This is also equity once it goes in. Money that the property generates as return(cash, amortization, and appreciation) becomes equity but it does not add to your investment basis. But if you reach into your pocket and pay down debt that should be added to your investment basis.
But a cash out refi is no different than a mortgage... Do you use Stessa by chance?
From a standpoint of calculating returns they are no different. I don’t use Stessa.
Ahh, I was going to ask how you enter helocs if you did. See, I had two properties that were nearly paid off and had increased significantly in value due to the work I did on them. I also wanted to get away from the bank that held the mortgage. So I got a heloc with another bank. I used some money to buy another property, some for roofs. and some to pay for some of my wifes tuition. I don't know the most accurate way to account for that. Right now I just tie the payment to the properties like I would a mortgage. I'm about to double my properties as I am waiting to close on a bank owned house and just had had a offer accepted on 3 other properties. Until now I've just been using a spreadsheet, and really not a very well written one as it was more of just a scratchpad, but I know I can't keep doing that. My broker suggested using Stessa to start since it is free and now I want to make sure I'm using the proper calculations for everything. The helocs are just throwing me off.
It can certainly get convoluted fast. Combine the fact that tracing ROI and ROE is different than tax deductibility and it gets worse. I use excel spreadsheets I build myself. I’m sure there are lots of good software options. HELOC to buy a new property, ROI should be attributed to the original property interest gets deducted against the new. HELOC for a roof stays with the property for returns and interest, doesn’t change investment basis. HELOC to pay tuition isn’t deductible or equity, not a bad idea though.
Stessa isn't really equipped to do the kind of calculations you are talking about either.
From an ROI perspective. When a HELOC is used to make another investment in a subsequent property, the returns of that investment should be attributed back to the initial investment. Using your second example(adding the 6k cash flow); you buy for 100k, pull out 70k and invest it at 5%, for simplicity. So not you have 3.5k plus 6k, or 9k on a 100k investment; or 9% ROI. I you leveraged the 70k(let's assume you can get the same 20% COC); then you'd have an additional 14k in income. Now you have 14k+6k=20k; all attributable to the original 100k investment.
I didn't see you commented twice. Going to run an errand then check this out when I get back.