I have a co-worker who I'm convincing to not buy this property.

Basically, he saw a 160k condo in Ocean Side CA that rents for 14-1500. After all expenses with 20% down he is returning negative -1.8% however, it's a 15 year mortgage at 4.7%, so principal payment is $550/month minus the 1.8% and he's looking a few hundred bucks income from 40k or so invested.

That may beat inflation if you consider equity buildup, but do people really invest this way? It just doesn't sound right to me. Does anyone else use equity as a determining factor when buying RE?

What's the opportunity cost of the $32,000 he has invested elsewhere and which will become his Down Payment ? (i.e. what's his return on it today?)

Well it's hard to beat inflation without some type of management

But the question was in real estate investing, are you suppose to include equity in your ROI or not? Like as a best practice. I thought not. I tend to like properties that put realized gains before unrealized gains but if you leveraged out, your equity over time could be huge despite a low ROI.

What are your thoughts?

equity (or increase in equity) would not be considered as part of operating return.

personally, I would not consider investment in individual condos a smart long-term strategy, unless the condo is in a market with very low historical vacancy rates.

Gotcha thanks for answering the question. But the other statement I think is a matter of demographics. Sometimes condos are better and usually closer to emenities or universities so the rental income can be just as good as SFH. THe ones in my area seem to be newer as well and require less maintenance than my 1984 built home which has been a PITA.

After some reading, I fully agree that equity should not be a factor infact ROI is required to stave off further price declines and vacancies. I think it would be stupidly to invest for equity alone.

Over time it always works out to be an average close to

30% operating and expenses
10% vacancy loss turnover
10% property management

50% cost average before debt service.Can be more in really old buildings or a little less in newer buildings.Depends on time horizon to sell.

If he is making a play for appreciation to outpace inflation he is speculating and NOT investing.

Many of my investor clients that live in California or other markets buy in Georgia because of high CAP rates and cash flow.Houses are more about market values.Commercial is about CAP and cash flow to drive value and forced appreciation over time.

4 avenues in investing is principal pay down,cash flow,depreciation,and appreciation (if any). Appreciation if rents go up 3% a year and appreciation climbs 3% you are in a neutral affect.

Buy based on sound numbers GOING IN and not on what MAY happen.