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ROI, Cap Rates, Rent Ratios – Do we sometimes get caught up in the analysis?

December 4, 2011

As a buy and hold long term investor my strategy is simple. Buy homes below their replacement cost and rent for steady income. I use the rental income to aggressively pay down any mortgage and reinvest in additional properties.    

Just like everyone else in this business – I have a quick calculator to analyze whether a property might make a good investment. I have my exact return numbers that I want. I track where I will start my bidding to my absolute high water mark. If I can’t get the property, then I move onto the next one. I know the rental comps, analyze the property at a conservative rent figure, assume even more conservative maintenance estimates, etc.

I think you must have some system to make sure you don’t grossly over pay, but I am beginning to wonder if there are other things I should be more concerned about. I am noticing the ones that look the best on paper with the highest returns and best ratios are not the best ones when it comes to day to day management and future appreciation potential. Keeping the buy and hold long term approach in mind, I think the better focus should be around the physical aspects of the property and even more importantly the class of tenants you are likely to attract. I really want the property that will be there 30 years from now and ideally have the lowest maintenance cost with the most uneventful tenant issues.

Ultimately I am building a monthly stream of income. Once their paid off, what I paid for it years ago is not as important to me. I have the monthly stream of income. It makes me wonder if in the end all of this analysis really matters. I need to use the capital that I have in the most efficient manner, but am I over analyzing every purchase? I know this statement will get a lot of scrutiny among investors, but – If you keep the end game in sight (a monthly stream of income) – does it really matter that you made the absolute best deal in getting there?

From → Buying

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