Getting people to keep apartment showings

Getting people to keep apartment showings
by James Miller

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It happened to me again yesterday.

I had a 5:30 showing set up at one of our vacant apartments. I arrived promptly, unlocked the place flipped on all the lights and set out the applications.

The guy never showed up to look at the apartment.

I waited for him to show for 20 minutes and then decided to take off.

It may or may not surprise you, but the events I just described are not that uncommon for property managers. I am pretty diligent about calling people the day of a showing appointment to remind them, but even with that measure in place, I still get around a 50% no show rate.

It really blows my mind that people will take the time to ask you about a place, set up an appointment and get directions, then decide not to show…or even call.

I have to admit I didn’t call this guy the day of the showing, but I had talked to him the night before.

Here is what I think happens in these situations and some of the steps I am going to take to try to resolve them. If you have any suggestions or ideas, please let me know..

1)The person I am talking to forgot about the appointment… although in this guys case, I doubt that you can forget about it that easily. We set the appointment  just the day before.

2) The person I am talking to is too polite to tell me on the phone that they are not interested in the apartment, so they set up a showing, knowing they will not show.

3) they may have looked at an apartment earlier that day and decided to take that one, blowing off the rest of the showings they had set up.

4) They knew about the appointment, but after a day of work were just too lazy and decided the couch or a trip to the bar sounded better.

There are probably a lot of other reasons that they won’t show as well.

Here are a few of the things I am going to start implementing:

1) I am going to call them back and ask why they didn’t show.My girlfriend was a recruiter for an insurance company. She would have the same problem with potential candidates and it drove her crazy. she would go so far as to call up people who blew appointments (and didn’t call) and tear into them, telling them that they just blew their chance to ever get a job there and that they should have at least called.
While I am not sure that affected her no show ratio, it apparently made her feel better.

2) I am going to start letting them know that I get a no show rate of 50% and if they can’t make it to call me.
I currently tell them to call if they can’t make it, and they have my cel phone number, but it doesn’t seem to make a difference. I will also point out that if they don’t show and don’t call, I will be calling them back to find out what happened.

One part of the problem, as I see it, is that they have nothing to lose by not showing. Since there is no realistic way for me to get a deposit over the phone, the only thing I can leverage against them is their contact information. I am not going to harass them or anything, but I will let them know that I was waiting for them at the apartment and it wasn’t cool to blow me off.

3) I am going to start letting the apartments show themselves.
While I like to meet the potential tenants, I have, in the past, been so busy that I had to unlock an apartment to let people through to see it without me being there. It works pretty well as I let them walk through and grab an application if they are interested and I think people like to be able to take their time when looking at a place.

I have been doing this with a lot of our lease option houses, as before the market slowed we would get so many requests to see the places it was virtually impossible to handle them.

I would like to hear from other landlords, property managers, and real estate agents, or anyone who has to set appointments with the general public. .

What are your no show/show ratios?

How do you prevent people from not showing up?

The Art of Patience in Real Estate Investing

The Art of Patience in Real Estate Investing
by James Miller

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I have a friend who is working on buying his first property. Besides looking for his own personal residence, he wants it to be a good investment.  He is looking for a deal.

He is looking at a REO (Bank Owned) property that has been siting for a while. The condition was pretty rough, so the bank decided to put about $5000 into it to replace carpet and paint the place. A surprisingly good move on the banks part.

The fun part for me is that I see a lot of what I felt and did when I was looking for my firs investment property. I see his excitement and energy.  I also see how he is too close to the deal and starting to justify things.

Today he called me and told me that they are only off by $1400 in price, and that he is feeling a lot of temptation to call up the broker and tell him that he will accept the banks last offer.

I preempted my next statement by telling him that it really comes down to how badly he and his girlfriend want the property. Since they are also looking at if for a residence, there can be some emotion involved.  And I would hate to see him lose the property if he really wanted it.

As I had walked through the property for him, I then followed up with these two thoughts:

“It is a good deal, but not a great deal.”

And

“Banks are a lot more flexible than they let on.”

He had told me that the lender claimed that under no circumstances can they come down that extra $1400, they are already at their bottom dollar.

If this was an individual, I may be more inclined to believe it, but in reality nobody understands the time value of money more than a lender. They have to know that the longer they sit on a property, the more it is costing them.  When given the choice between a $1400 hit and waiting another six months before getting a seller, I have to believe that the bank will eventually cave in.

There is always the chance that my friend will miss out, that some other investor or individual will decide on buying the property at that price, but if you can position yourself so that you are ok with any outcome, you will always do all right.

Patience is the real key to buying, especially when starting out, where everything looks like a deal and you are so hungry to start investing , you can barely stand it.

Here are the basic steps to placing an offer on a property so that you can rest at night.

1) You need to quickly evaluate a property as best you can.
2) Set the price/ terms you are willing to buy it for
3) Negotiate to do better than the Price and terms
4) Be ok if you get an accepted offer, and willing to walk away if you don’t

I also noticed that my friend was commenting on how his Realtor was pretty close with him and he felt comfortable that he was looking out for his best interest.

He then later told me how the Realtor had commented that $1,400 was only going to be an extra X number of dollars per month on a payment.

This is a common technique that is used to sell. Taking a number that seems large and breaking it into terms that seem smaller. We have all heard some advertisement that talks about how something only costs “31 cents a day” or “less than your daily cup of coffee each morning”.  This technique is used to break down our barrier to a pricing objection, by making it seem to be an insignificant amount.

When I heard that the Realtor did that, I told him that he might want to be wary about whose side the Realtor was really on.

I can only imagine how the enticement of a commission in these slow times can be tempting, maybe even to the point of bending morals.

Here’s a Real Estate Marketing Idea…

Here’s a Real Estate Marketing Idea… by James Miller

A few years ago, Luke Ploessl and his wife began to invest in Real Estate in the City of Cassville.  With the current situation on Wall Street, they can no longer afford to keep all their properties. They tried to sell them, but no buyers emerged. So they are giving six of them away to the people who write the best essays.

I am sure that part of the motivation came when the proposed 1.3 Billion dollar Alliant energy plant expansion fell though. The community had high hopes for this plant as the downtown is dying.

I had a lot of four commercial buildings under contract in Cassville late in 2008′ . When the Alliant plant fell through, so did the upside potential of the deal which gave our lender cold feet.

Desperate times call for desperate measures.  Mr. Ploessl certainly has a novel marketing idea.

I am guessing the essay is a requirement to meet some sort of Wisconsin law, otherwise I would think a raffle would have been a bit easier.

Besides generating $100 per entry.  They have already been given coverage on the local NBC affiliate,  Channel 15 .

check out the video coverage here:

http://www.nbc15.com/home/headlines/38828567.html#

I bet this method of marketing their homes is also getting them a pretty big buyers list.  Every entry is a potential home buyer.  He is getting paid to generate a list of buyers.

As the English say:  “Brilliant”.

You can find out about the essay contest here:

http://www.winahouseessaycontest.com/

The “right” Real Esate Investing system

The “right” Real Estate Investing System
by James Miller

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One of the confusing parts of getting started in Real Estate investing is that there are so many different ways to do it and so many guru’s out there touting why their way is the best.

I am going to let you in on something it took me a while to discover.

It all works.

Yep. Just about everything you see out there every one of the late night infomercials, every guru you have ever hear talk at a seminar and fought the urge to run to the back of the room to buy their CD’s or Boot camp. All of their stuff works.

But it doesn’t work for you.

Here is the difference:

It doesn’t work because you are doing something wrong.

I run under the assumption that there is a way to make just about every money making opportunity I  have ever seen work, but the limiting factor is me.

As an example, I had a hard time getting used to the idea of putting up “I buy houses” signs and ads all over the place. It just seemed too cheesy to me.  One of my partners was fully on board with this phrase.  She took the time and money  to have vinyl letters made with this phrase and her phone number on it and placed them on her car.

I could barely ride around with her in that car I was so embarrassed by it.  I was wondering what people must think.

She had spent $60 on those letters and gets an average of three calls a week from someone wanting to sell their house.  There are also people who come up to her at gas stations asking about it.  She has even been pulled over by a police officer who wanted to sell his house.

Because I wasn’t comfortable with the idea of that cheesy phrase,  “I Buy Houses” didn’t work for me.

Guess what most of my house buying advertising says now?

Too often we get in the way of our own progress by wanting to change a proven system, or not following through with what we are supposed to do because we don’t feel comfortable with it.  Often we want to save some money by changing things.

If we try something and then later give up. It is very easy to blame the system or the person who taught us, but the true nature of why we aren’t successful is that we have done something wrong.

We are the ones to blame, yet we never do see ourselves as the culprit.

If you look at Real Estate, there are thousands of people who are successfully short selling, successfully flipping, successfully assigning contracts, lease optioning and buying using land contracts.  People have been using creative techniques to make money in this business for decades.  So there is a way to do it.

There is a path to follow to get the goal you want.

But you will never get there is your focus is on finding the “right” program.

They all work. You just need to make sure you take the one you have and do it the right way.

The Real Estate Investor mindset.

The Real Estate Investor Mindset by James Miller

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Eliminate the entitlement mentality.

If you are the type who thinks that you deserve certain things just for existing, you should stick to a day job.

We don’t deserve anything.

Please understand that everything we have, has come to us  either as a gift or in exchange for some service.   We need to be grateful for what we have.

It is also good to keep in mind that, from here on out, everything you will receive in your life is owned or controlled by some one else at this very moment.

Understand that everything is your fault.

With very few exceptions, I am certain that everything bad that has ever happened to me can be linked back to something I did that I shouldn’t have, or something I didn’t do that I should have.

Even if you are in a car accident that is caused by someone else, I hear that insurance companies consider you 10% at fault just for being there.

You take control of your life when you realize that you are responsible for the outcome. I honestly feel sorry for people who continually feel taken advantage of, or that they have been victimized.  How little control they must feel they have over their lives.

In high school my car had broken down and the stereo and musical car horn (yeah, I was that cool) had been stolen out of it.

I was very upset.

I vowed to find out who did it. I reported it to the police. I watched everybody and anybody with the suspicion of a tv police detective, I even eventually accused innocent people of the crime.

In reality, I was at fault for not locking the car after it broke down. Even though I lived in a small town, it was an obvious and completely irresponsible thing to do.

I could also say that I was responsible for choosing such a faulty car, or not maintaining it. You see, there are lots of significant points that lead up to any given event, and if you can accept looking at it this way, “blame” and “fault” become a very slippery words.

Mindset of Service

There is a saying that goes “you can get anything you want by helping others to get what they want.”

This is vitally true for Real Estate Investors. Our job is to help people to buy and sell their homes. We use the knowledge we have to make this happen for people whom, most of the time, cannot get it done in any other way.

We are at their service.

If we keep in mind our service to others, great things can happen.  For one, you stand out.

I remember a guy who had called me about an apartment.  I didn’t have what he was looking for, but made some calls to other landlords on his behalf and gave him the names and numbers of a few more landlords that I knew.

He was so grateful he stopped by the house I was working on and told me “Thanks so much, you are the nicest guy I know.”  While I didn’t get him as a tenant, I could tell his compliment was genuine, and for me, was reward enough.

If you do this with enough people, word gets around that you are the person who will go out of your way to help someone, even if you have nothing to sell them directly.

Have a thick skin.

You will especially need this when starting out. Creative Real Estate Investing seems to have a bipolar distribution of proponents that love it and those that think people using these techniques are financial scoundrels,  scamming people out of their home equity.

It is only fair to assume that there will be those close to you who feel the same way.  As Jesus said “Only in his hometown, among his relatives, and in his own house is a prophet without honor.”

You will need to have particularly thick skin with the people closest to you. It is probably best to wait to tell them anything until you have what Ron Legrand calls the “shut up check”, from the bank or title company.

Ready- Fire-Aim.

In this business you can’t wait for all of the lights to be green before pressing on the gas, because the lights will never all be green at the same time.

The best you can do is to start out with low risk ideas, things like Bird-dogging, Assigning contracts, or working leads for another investor.  As you gain confidence and experience you can go onto bigger and better opportunities.

You need to be like an airplane in flight, start off in the right direction, build up speed to get off the ground, and once in flight, continually reevaluate where you are at and what you are doing to best align with your target destination.

Self Motivation

In this business, you are accountable only to yourself. Know your limitations and find people to partner up with to compliment what you lack.

I learned this lesson when I partnered up on a deal with my friend who is a banker, besides getting us a great deal on the interest rate for our loan, he keeps simple yet immaculate records of everything that is going on in that LLC.

I had no idea how bad I was at this until I did this deal with him.  I just knew I didn’t like it.

As a Real Estate Investor, you are also the only person who is going to get the things done that you need done. There is no boss to be accountable to in this business. Only yourself.

Patience and Persistence

Getting something going with real estate can take a long time. In order to find the killer deals you have to kiss a lot of not-so-pretty frogs. Some of these frogs will swear to you that they will turn into a Prince despite the warts.

Every seller I have ever talked to has some reason that his or her house is a great deal. Some actually get me believing it for a while, but very few actually are.

It can be a hassle screening through property after property, but eventually you find the one that is worth it.

Continual learning.

There are a lot of things to learn and some can only be understood by doing them.

One example I can think of is going to the closing for your first bank loan.  Nothing written can precisely, and fully, prepare you for exactly what you will think, see, and feel during the closing.  The party of players sitting around the large conference room type table, the nervousness in the air. the large amount of paperwork you resolve to sign, without fully knowing the meaning of.  The realization that everyone there is getting a piece of you via your bank note.  Nothing can educate you to that experience that  actually sitting in that chair can.

Accept that you will make mistakes.

This is really part of the learning process.  You can’t get around it. Accept mistakes when they happen, and take with it the associated learning experience.

You will have likely paid dearly for it.

Why would any one want to be in Real Estate?

Why would anyone want to be in Real Estate? by James Miller

This question is particularly pertinent right now.

Here are my top reasons for investing in Real Estate… especially now.

1) Real Estate is on sale.

Houses all over the country are selling at a discount from the sellers themselves, from the lenders, or even the US government.

2) I love the Write offs

Real estate allows me to depreciate about 3.3% of the value of the property the first year.  It is a declines after that amortized over 27.5 years. But this is a phantom loss that I can hold against my earned income. Sure I have to realize that deprecation when (or if ) I sell, but the dollar I can write off today is worth much more than the dollar I have to pay back in the future. this is the whole time value of money thing.

Since my real estate is set up as a business, there are plenty of write offs we get to take in our daily real estate routine.  Things like computers, printers and digital cameras are necessary for the work we do on our rental and rehab properties.  So are the tools I pick up at Home Depot, and many other things.

This is essentially a discount from what I would have to pay if I used these things for personal use.

I currently have so many write offs (and I am so underpaid at my current job) that I have not had to pay in income taxes in the past several years.

3)  I can get into a property cheap.

No other time in my investing career has it been so easy to buy a property from a seller with so little out of pocket.  I have literally had sellers pay me to take their house.  I have others where my net out of pocket was only a few hundred dollars and several more where the cash outlay were limited to just a few thousand dollars.

These are small sums that allow you to take control of an asset easily worth 100 times the amount you have into it.

4) Property appreciates in value.

No, I swear it really does. We have had a bumpy ride over the last few years, but when the fear is over and common sense comes back to the market, we will again see the slow steady rise in real estate values that we have been accustomed to over the past 100 years.

I am not saying that there won’t ever be bumps in the road again. I am just saying that what we have seen is an anomaly due to overzealous investing from abnormally easy loans.  Everybody got spanked.  We’re sorry and we promise not to let it happen again…. even though it eventually will.

5) Property provides cash flow.

I am making reference to rental property as rehab property can cost you money until you sell it.  I am in a particular pinch right now as I have three vacant homes we are in the process of selling that have created a net negative cash flow.

I took my eye off the cash flow ball and focused a bit too hard on the speculative rehab profit.  The market tanked and  I am in line with a lot of other investor and developers…. trying to sell ice to the Eskimos.

How can you learn from this lesson?  Always keep your eye on cash flow. As Billionaire Bill Bartmann says, the most important number in your business is the amount in the checking account. When that  goes to zero, everything stops.

If you always have a positive cash flow, your checking will never go empty.

Real Estate Investing – The Greater Good

Real Estate Investing – The Greater Good by James Miller

So much of the focus on Real Estate Investing seems to be on making money. That is the first and truest motivation for what we do.  I feel that there is nothing wrong with this. Being a capitalist, I think anything that gets the Money moving in our economy actually does us good.

But before I turn this into  Gordon Gekko’s Greed is good speech, I want to talk about the other side of what we do, when we buy or sell a place using creative real estate techniques.  I want to talk about how it helps people and the overall good it does.

Think of the benefits to our local economy and community when we do the following investing action:

When we buy a fixer upper, repair it, and resell it with seller financing:

1) We are saving this home from further ruin that time can create. At some point homes become so deteriorated that after enough time only the only choice is the wrecking ball. By saving these homes we are indeed recycling them and keeping a large amount of material out of the landfill.

2) We raise the property values in the local neighborhood. This may or may not happen to any significant degree, but it makes it easier to sell your house if it is sitting next to a freshly  restored Victorian, as opposed to being next to something that looks like a haunted house.

3) We increase local tax revenue. While we never like to see it coming, we benefit the community by creating more assessed value in a home that benefits the tax roles.  This is a dollar savings that  minutely lowers everybody elses taxes.

4) We minutely lower the cost of housing by providing another viable living space.

5) We give hope, usually to a family that is transitioning from renting to the American dream of home ownership.  We are providing renters a way to start building equity in their home even though they may not be able to qualify with a bank right now.

6) We give hope, to the seller we buy from who could not move their home otherwise. This is especially true in this tight market.  I have talked to Realtors who have sold nothing over the past six months.

With our ability to sell via lease options and other creative means, we are constantly and consistently able to sell homes.

7) We are good for the economy. I believe that if there were a massive push from our government to educate it’s population on the ways of creative Real Estate Investing we could pull out of this economic slump without the need for huge bailouts.

The banks would still have to take a hit, but a nation of savvy and creative Real Estate Investors and home buyers could eliminate the inefficiencies in the market.

If you think about all of the people out there right now who would gladly rent or sell their property with creative financing, just to get out of it, but they don’t know how, so they are letting it go into foreclosure.

Compare that against the amount of people that are ready, willing, and able to come up with a little money down and make the monthly payments in order to get into a home of their own… but they don’t know these options exist.

If you compare these two things then we know that there is room for us to make a difference in our economy without a huge infusion of bailout cash.

…..Then again, maybe I am just an idealistic dreamer.

Since posting this I have read Francine Hardaway’s open letter to two mortgage companies. In her blog, she talks about how much better things would be for her and her lenders if  they would accept a reduced interest rate as opposed to her only other option…Foreclosure.

How to avoid a Real Estate lawsuit

How to avoid a Real Estate lawsuit by James Miller

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I have been investing in real estate for 13 years and have not yet been taken to court.  I have had to sue and evict tenants that didn’t pay, but I have never been to court as a defendant over a Real Estate deal.

I have gotten in a  “discussion” on a Real Estate Bulletin board where there seems to be some strong feelings as whether or not to use a purchase and sale agreement when taking over  a property “subject to”.

I have an attorney who  adheres to the KISS principal and that any time you can get by without using a piece of paper, you do so.  He feels this way as any document you create or sign can be construed two ways, for you, or against you. As I understand it, the court looks more critically upon the person who provided or drafted a document.

It occurred to me that the reason that people feel so strongly about their need for legal documents is that they want to feel protected. They are afraid that if they don’t have the right piece of paper someone will get them.

It is my contention that if you focus on helping people, treating people fair and honestly and if you don’t try to take advantage of them then you could get by with very little documentation.  If they are in agreement with what you are doing, there is no reason for them to sue.

Here are the things I try to do to keep that from ending up in court:

1) I don’t make promises I can’t keep.
I certainly don’t sign any agreement where I am agreeing to do something that I don’t think I can do.  I tell people where I sit with regard to the deal and make sure that

2) I make sure my intent is clear.
If I ever end up in court and there is an issue over a series of events, I want everyone to know what I was trying to do.  If possession is nine tenths of the law then intent has to be the other tenth.  It is awfully hard to misinterpret events if the intent was clear.  I will often times use a non-committal letter of intent to fill in the blanks on any understanding that I have with someone on  a  Real Estate deal.

3) I don’t piss people off.
I don’t get in arguments on a $100,000 Real Estate deal over a few hundred dollars.

I seek first to understand what they want to tell me, and then let them know my position.

I try to sandwich bad news with two positive things.

I let them know that we are in it together and I am doing what I can and that I am always going to be fair honest and open with them.

I feel that the main reason that people end up in court is that they get upset because they feel that hey have been taken advantage of, or wronged in some way where the other party will not make it right.

4) If I wrong someone, I make it right.
Often times I will go above and beyond to make it right.  I believe that there is a certain inertia or stickiness to the way a person feels about you.  If they like you it takes a lot for them to not like you, if they don’t like you it takes a greater effort to make them like you again.  By doing more than what is expected to make something right, you can overcome the inertia of dislike.

5) I keep my properties in LLC’s and Hire out much of the work I need done.
In order to be sued, you either need to do something, or have something.  By keeping the properties in separate LLC’s or land trusts I limit the amount of exposure that any one property has. By having others do the work, I limit my own personal exposure to lawsuits, by not creating damages or negligence through my actions.

While nothing can keep you completely safe from getting sued, I think these things have helped to keep me on the plaintiff side of the courtroom.

Taking on the language barrier as a landlord

Taking on the language barrier as a landlord. by James Miller

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I have had two semesters of Spanish in high school. Since that has been over twenty years ago, I now know just enough Spanish to unintentionally insult someone or get arrested in Tijuana.

I am guessing that this topic will be a foregone conclusion in places like California, but here in the Midwest I am finding that intolerance and discrimination is indeed prevalent in my local rental area, and there are lots of qualified Hispanic tenants who are being turned down because their primary language is Spanish, and the mom and pop landlords don’t know how to deal with this.

I find that many of these landlords characterize all Spanish speaking people as “Mexican”, and seem to believe that letting in Hispanic people will cause their apartments to become run down and create all kinds of trouble.

I realized that because of this, catering to English as a Second language (ESL) tenants was basically an untapped market.

When I started taking on Spanish speaking tenants, I also found them to be some of my best tenants. Rent was paid on time, apartments were kept very clean, and I even see that the majority of them who take their shoes off at the door.

This wasn’t always the case, but in my experience I had a better than average experience with my Non-English speaking tenant base.

The only time a problem arose was when I needed to communicate with these tenants.

Here is what you will need to do as a landlord or property manager to bridge the language barrier:

1) The first thing that I needed was a translator.

There is usually someone in their life who can communicate in English fairly well. Often times they are in contact with professional translators who can get the job done. many times job placement agencies have people who are fluent in both languages. Then there is also the local high school Spanish teacher.

Many times they will jump on this opportunity, and can become a faithful resource if you compensate them modestly.

2) Get the leases changed over to Spanish.

I am not sure of the legal ramifications of a ESL tenant signing a lease written in English, but getting the lease changed over is a one time cost for something that can be used over and over again.

3) Use written communication.

I use freetranslation.com, which can translate into several different languages. It doesn’t always translate everything 100% correctly, but gets the general idea across.

After having tenants laugh at something I had translated using this service, I figured out that using a two step English to Spanish, then Spanish back to English translation lets me verify if there is anything that can be potentially confusing or embarrassing.

4) Don’t be afraid to try.

Not knowing a language can be intimidating, but I found that we can communicate quite a bit with some broken words and pointing. Even though they all have my phone number, most of the time my Hispanic tenants will wait for me to stop by the apartment building and pull me aside if they have something that needs to be fixed.

The language barrier also helps to reduce nuisance calls, as ESL tenants will take care of the issue themselves if they can.

Some of my English speaking tenants will call me for just about anything. I have received calls asking me to replace burnt out light bulbs in apartments (even though that is their responsibility), or how the neighbor doesn’t always put his garage door down. yes, true story.

5) Make an effort to learn some key words in Spanish.

Don’t give me the “They should speak English if they want to live here” routine. That isn’t even the point. The point is to fill the apartment wit the best qualified tenant that you can.

By at least partially learning another language, you are opening yourself up to a ever growing tenant base.

Cash on Cash Return vs. Internal Rate of Return

Cash on Cash Return vs. Internal Rate of Return
by James Miller

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Cash on Cash
Cash in Cash return, or Return on Investment (ROI)  is the easiest Rate of return to calculate. It is also the one I use the most often as it tells me what the money is generating with regard to actual cash I can put in my pocket today.

To calculate it you take the amount you are getting from an investment, typically on an annual basis,  and divide it by the amount you have invested. Multiply this number By 100 and you have a percentage representing Cash on Cash Return.

For example if I have $10,000 in a property that is netting $100 per month, I am getting $1200 per year on my $10,000.

I divide the $1200 by $10,000 to get .12   I multiply this number by 100 to get my percentage of 12%

As you can see, cash on cash is a pretty simple and straightforward calculation. But what if we want to take into account the amount we are paying down on the loan each month, or the appreciation of the property?

Internal Rate of Return
Internal rate of return (Sometimes called Annual percentage yield) is the total true return on an investment taking into account depreciation, appreciation, and equity gained from paying down the debt.

It is much harder to calculate, as items such as depreciation depend on your taxable income. You also have to make some assumptions with regard to appreciation until a property is actually sold and that number is known.

This calculation is typically done over a holding period of 3 to 7 years. The period is usually fairly short since IRR typically decreases as time goes on.

If we take the example above assuming the following:

1) Home is worth $100,000.
2) I can depreciate 3% of its value the first year,
3) I am in a 35% tax bracket.
4) That property values have appreciates at 6% that year
5) I am paying down $100 per month toward the principal on my mortgage payment.

We get the following:

$1200   Cash on Cash return from above
$1050    Depreciation ($3000 Depreciation X 35% tax bracket)
$6000   Appreciation ($100,000 X 6%)
$1200   Principal Pay Down ($100 X 12 Months)
_______
$9,450   Total Internal Return

As a percentage:

$9450 first year IR divided by $10,000 initial investment = 94.5% IRR the first year.
Keep in mind that this is not spendable cash. Appreciation was our biggest number and it won’t be realized until we sell the home.

I have found that if I am doing well with regard to cash on cash return, my IRR Is going to be a better number. This assumes that there are no deferred maintenance issues and that I am not going to sell the property at a loss.