According to Maslow's hierarchy of needs, shelter is a basic need like air, water, food, and clothing. Therefore, as a society, we should strive to give everyone a chance to meet those needs.

Providing affordable housing for everyone - not just HUD's limited rental assistance - seems like something the wealthiest nation in the world should be able to do. But it's not currently doable for many complicated, multidimensional, dynamic reasons.

Direct and Indirect Building Costs Are Increasing

The cost of materials, building permits, and building requirements have increased. And it's a multiplier effect: more requirements = more time and materials (both of which cost more) to do right.

And let's not forget about indirect costs like transportation and food. Fuel costs are higher, and so are the vehicles to get to the job site.

To be clear, I'm not saying all of these are bad. For example, some building requirements are great! There's a trade-off; as a culture, we've decided to prioritize safety and comfort over price.

All of these factors increase the price of a new or remodeled home. So, simply building more homes doesn't fix the affordability problem.

I mean, it's possible to do in 20 years if housing starts can outpace population growth, but that's incredibly hard to do. Of course, overbuilding can also create a new housing crisis with crashing real estate prices (and environmental issues). As a real estate investor, I don't love that idea, but maybe that's what's best for society in the long term.

While the US population has increased, the 

. In 1960, there was an average of 3.33 people per household, but in 2020, it fell to 2.53 people per household. And those trends accelerated during the pandemic.

Furthermore, we're demanding larger homes. 

I talked with a builder of a new housing development a few years ago, and I asked why they weren't putting solar panels on every new home. He responded, "Each home is built to suit, and we give that as an option. 100% of the time, people choose to have an extra 500 square feet instead of solar. We design the roofs to be solar-ready, but people would rather pay for space than renewable electricity."

If we demand smaller, more efficient homes, builders will do it.

But we don't, making it that much harder to keep houses affordable.

To make matters worse, instead of helping the situation, many landlords are making it worse by seeking the highest possible rent for the least acceptable quality and condition. They get away with it because there simply aren't enough places for people - tenants don't have a choice.

For example, where I live, I get 10-15 applications within 4 hours of posting a rental because fewer than 10 similarly sized places are available.

I once had a lady touring a property who brought her dad (I advise all females to bring someone along, so everyone feels safe). He started nitpicking everything in the 1930s apartment. Yes, it's old and vintage, but everything worked and was in good condition. Eventually, his daughter pleaded with him to stop, "Dad, this is the only apartment available in the city at my price range. I don't have a choice." I shrugged my shoulders in agreement - I had 8 other qualified applicants ready to go. What's my incentive to do better or charge less when I have, in effect, a monopoly in the market?

Layer on top of that mom-and-pop landlords who don't learn the required professional skills (like screening for people with enough income, or returning calls on time), and it's no wonder people question if it's morally right to profit off a basic need like housing.

I tend to favor rules that promote personal freedom coupled with personal responsibility. I believe that provides the best environment for people to thrive. But guardrails are also necessary, especially for the neediest in society. So, maybe there should be an education/license or home inspection requirement to become a landlord. This will add a massive time and expense to everyone, which doesn't directly help affordable housing, but it could improve the experience of tenants.

For example, you must hold a license to manage someone else's property in Oregon. Getting your license requires taking classes on tenant-landlord laws, including fair housing and discrimination laws. It's not the most exciting part of investing, but it's important.

For another example, before getting your motorcycle endorsement in Oregon, you must take a 2-day class that teaches you how to ride and pass a skills test. A state-approved private company runs the classes. I could easily see a requirement like this for each landlord.

You'll still have people undermining these regulations, but something like this could dramatically reduce the number of unprofessional landlords.

Rent caps have historically failed to control costs. Oregon instituted rent caps in 2019. But, the average rent 

, above the national average. Wait, how does that work? Let me explain:

When rent caps started, construction projects slowed down, reducing inventory. As I mentioned, I get at least 10 applicants within the first 4 hours when I post a rental. It's kind of crazy. When supply exceeds demand by that much, I can almost set my price to anything I want. Apparently, 46% higher, on average (probably more, since that statistic includes people who didn't move).

And anyone who doesn't move gets the maximum allowable rent increase. What are they going to do? Move? If they can find a vacancy (they can't), they'll pay waaay more than the rent increase.

I'm not saying it's right (I didn't increase any of mine by 46%), but that's what's happening. Rent caps made the housing situation worse, not better. It's a perfect example of unintended consequences. Lawmakers assumed a static housing market, but it's dynamic.

I suppose lawmakers could create a law that caps rent increases between tenants. That sounds like an enforcement nightmare, but more importantly, that dramatically reduces everyone's incentive to repair and improve a rental.

What About Expanding HUD Rental Assistance Payments?

, Matthew Desmond advocates significantly increasing HUD's budget. That way, more people can get financial help (a rent subsidy), and investors are still incentivized to build and improve their units. I, obviously, like how that sounds, but there's an almost certainty that rents will skyrocket the same way college tuition and health care costs have.

I have a hunch it will help in the short term, but over time, investors will consolidate into massive nationwide companies. Then, they'll use their massive portfolios as rent comps to further drive up rents.

And even though the US is monetarily sovereign, the money has to come from somewhere.

In my opinion, the only thing that will make housing sustainably more affordable will come from technological improvements that, in absolute terms, decrease the cost of living. I see four areas ripe for improvement:

Transaction costs are ~12% of a purchase price and are long/complicated (not to mention the physical cost of moving). Technology improvement could drive those costs to almost zero and make them happen as easily as buying on Amazon.

For example, tools like AI - for contracts and accessing a home's condition - and the Blockchain - for tracking ownership and funds - could help speed up and standardize transactions.

These could also make it easier for tenants to vote with their wallets and feet by making moving easier. Right now, switching costs are too high to do easily.

Building using robotics and additive manufacturing could allow for cheaper/faster/more efficient construction. As a culture, we like to have unique homes, but if we didn't, it would make this transition fast!

But these also create new problems, such as reducing the number of well-paying jobs. But that's been happening throughout history, and like the personal computer, I hope they create more jobs than were replaced.

Self-driving cars, or VR, would make it easier to live farther away, increasing the supply of usable land. Right now, large cities tend to be next to a water source, but what if that didn't have to happen? What if big cities could be anywhere because it's easy to get everywhere?

There are huge societal implications with changes like these. And likely a lot of unintended consequences I'm not imaginative enough to think of.

We use a lot (a lot!) of land to grow crops. Innovations like 

 in warehouses are one possible solution. Stacking plans vertically with automated climate/water control allows food to grow in a much smaller footprint. Plus, they can be closer to cities and reduce delivery costs.

It's not perfect and not nearly as cheap to start, but it can go a long way to increase the amount of usable land.

Markets are dynamic, and we'll never reach a perfect equilibrium. If we push for too much change in one area, it'll cause a problem elsewhere. So, only trying to change affordable housing through regulation won't work. Unfortunately, technology solutions will take time to invent and gain adoption.

As for me, there's one thing I can do today to improve the situation: act professionally and provide significant value above and beyond what I charge for rent.

I once had a tenant leave me a long message about a repair. It started normal, but then he worked himself into an uproar that included cussing and name-calling. I was surprised and confused. But instead of calling back and yelling, "You don't get to talk to me that way!" I empathized with his difficult day and told him when we'd fix the issue. Sure enough, he called back, apologized profusely for his behavior, and was easy to work with going forward.

I strive to act with integrity, fairness, and concern for the well-being of others because that's how I want to be treated. And do I make a profit? Absolutely, just like every other business. That's what allows us to create pleasant places to live and have the time to give our residents extra attention.

Do I charge the maximum the market will allow? I do not. That's because I wouldn't like to rent from a landlord who sought the highest possible rent.

It doesn't solve everything, but it's critical to solving the affordable housing problem. As investors, we need to stop trying to maximize our own lives and wealth at the expense of others. Over time, as we put others' needs ahead of our own - and continue to invest in new technology - we'll collectively solve the affordable housing problem.

The affordable housing crisis in the US is complex because of rising construction costs, demand for larger homes, unprofessional landlords, and more.

The affordable housing challenge in the US is complex due to factors like rising construction costs, demand for larger homes, unprofessional landlords, and the limitations of rent caps and HUD assistance programs. But there's still a way to solve the problem. Some solutions will take decades to impact affordable housing, but some can be started today by investors everywhere.

Why Affordable Housing Is So Hard To Solve, Here's How To Solve It

Like any industry, there are special terms that are helpful to know. Here are some of the most common ones in plain English. You can bookmark this resource to reference later.

Here's each term in alphabetical order. Click the word to go to its definition.

Average Annual Return (AAR), aka Annualized Return

General Partner (GP), aka The Operator or The Sponsor

Income Statement, aka Annual Property Operating Data (APOD)

Rule 506(b) and Rule 506(c) of Regulation D

A temporary group of people (or businesses) who pool their resources to purchase an apartment building that would otherwise be difficult or impossible to buy on their own. You might sometimes hear this referred to as fractional ownership. 

They organize the syndication and assume a day-to-day role in managing it. They find the property, secure financing, manage the property, provide tax reports, and share key performance metrics with investors.

There's some nuance between the three names, but for the most part, they're interchangeable. Having more than one GP in a deal is common, called co-GPs. 

They provide the cash and receive an equity share, cash flow distributions, and profits in return for their investment. They have restricted voting power and no day-to-day involvement in the business. Their liability for the property's debts cannot exceed the amount they invested. 

"A person who meets certain standards of wealth and sophistication." There are two primary ways to qualify as an accredited investor:

Net worth over $1 million, excluding your primary residence (individually or with spouse or partner).

Income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years and reasonably expects the same for the current year.

An SEC regulation that allows two distinct private placements of securities:

: No general solicitation or advertising is allowed (i.e., we must have a prior relationship). Securities may not be sold to more than 35 non-accredited investors, but to an unlimited number of accredited investors.

: Issuers can broadly solicit and advertise. All investors must be accredited, and everyone needs to be verified.

In other words, when you invest in a syndication, you're not buying the property directly. Instead, you're buying a private share of an LLC that owns the property. Learn more: 

A document that specifies the terms of a limited liability company according to the needs of its members. It also outlines financial and functional decision-making. 

A legal document that states an investment's objectives, risks, and terms. It includes a company's financial statements, management biographies, a detailed description of the business operations, and more. It serves to provide buyers with information on the offering and to protect the sellers from the liability associated with selling unregistered securities. 

An investor's application to join a limited partnership (LP). It's also a two-way guarantee between a company and a new shareholder (subscriber). The company agrees to sell a certain number of shares at a specific price, and, in return, the subscriber promises to buy the shares at the predetermined price. 

A 1-year financial statement showing a property's income and expenses by item. At a minimum, it shows the Net Operating Income, and sometimes it will also show debt payments and reserves. This is a detailed picture of a property's financial performance. There are four ways it's calculated:

: A trailing 12 months of historical income and expenses. It's usually broken down by month with a total so you can see anomalies in the income stream.

: A trailing 3 months multiplied by 4 to create an annual run-rate. This is often useful for gross income since operations tend to trend in one direction or another. Many people use the T-3 for income and a T-12 for expenses when underwriting deals.

: Often used by lenders to gauge the trend of the income.

: A forward-looking Income Statement using projections and assumptions. If the seller's broker provides it, it's usually optimistic.

This equals all revenue from the property minus all reasonably necessary operating expenses. The NOI is a before-tax figure on a property's income and cash flow statement, excluding principal and interest payments on loans, capital expenditures, depreciation, and amortization. In other industries, this metric is called EBIT, meaning "earnings before interest and taxes." 

A simple table that breaks down the income by unit. It typically includes the unit number, the tenant's name, when they moved in, when their lease ends, their monthly rent, deposit, and any past due balances. It might also contain unit details like the number of bedrooms and bathrooms, the square footage, and the possible market rent.

While the document is simple, it's critical when evaluating a property's financial performance and potential. 

An accounting method used to allocate a physical asset's cost over its useful life. It allows real estate investors to write off 3.6% of the value of the building each year as an expense, even though there is no out-of-pocket cost for this expense. 

A technical process (that we manage) where short-life items are separated from long-life items and depreciated rapidly over 5-7 years. This typically doubles or triples depreciation during the first five years of ownership. 

This is when we collect funds from Limited Partners when the need arises - to make a new investment or pay expenses. When you sign a subscription agreement, you're committed to that amount.

The order of operations is the opposite: once your funds transfer, we countersign the subscription agreement. This avoids any awkward calls and gives preference to investors who act first. If the deal becomes oversubscribed - we have more funds than needed - we'll return the principal of investors who transferred last.

Sometimes during the hold period, expenses are higher than expected, and the operating reserves become too low. If that happens, there could be a second capital call proportional to your ownership. It's rare, and we'll communicate 

 before it happens, but you should be aware of it. 

These are funds used to upgrade and maintain the property. Examples include repairing a roof, replacing windows, or painting. They're above and beyond daily operational repair and maintenance costs. In addition to raising funds for the downpayment, we'll also raise funds to complete value-add improvements to reposition the property (see property terms below). 

Found in the Private Placement Memorandum, this describes how to allocate investment returns among a group of investors. Here's one common distribution structure:

: compounding 8% plus 100% return of original investment.

: 70% to investors up to 15% IRR, 50% to investors above 15% IRR.

This priority of distributions remains consistent across cash flow, refinance proceeds, and sale proceeds. Furthermore, our investor's ownership is never diluted. Even if 100% of their capital is returned to investors, they still own the same percentage of the deal. 

The lender can go after the debtor's other assets not used as loan collateral or take legal action in case of default to pay off any remaining debt. A recourse loan only affects the General Partners. 

This is similar to a mortgage on a home. Usually, the term is shorter (20-25 years), the rate might only be fixed for the first few years (~5 years), and there's a balloon payment in the middle of the term (~10 years). The loan-to-value (LTV) is also lower (70-75%) than a home. 

Government-backed loans (Freddie Mac and Fannie Mae) that are non-recourse, offer 30-year fixed financing, and can be up to 80% LTV. Loan sizes start at $3 million, so these are for larger properties. 

These short-term loans (12-24 months) help investors quickly buy a property, do a significant rehab, stabilize the operations, and refinance with a longer-term loan. 

The strategic use of renovations and capital improvements on properties to change their place in the marketplace. There are three ways you can reposition a multifamily property:

: considered light value-add. These include landscaping, painting, flooring, and appliances.

: considered heavy value-add. These include changing the layout or adding new amenities.

: change in the way the property operates. Typically it includes removing trouble tenants, increasing occupancy, or adding additional revenue opportunities like laundry machines.

Any commercial property with existing income and significant opportunities for improvement via operational enhancements, property repositioning, or redevelopment. In other words, value-add properties have some income but are not yet at their maximum potential.

Suppose we can increase rents by 10-20% by only putting in 5% of the asset price. In that case, there is an inherent gain in value, especially when we leverage with financing. The most typical ways to add value to an asset are through construction upgrades and reduction of costs. 

In multifamily investing, we categorize properties by classes: A through D.

 properties are in excellent condition and quality.

 properties may be a bit older with a couple of maintenance issues.

 properties are older with a lot of deferred maintenance and likely a few larger-ticket issues.

 properties typically require a complete rehab and significant repositioning. There are probably drug or crime issues at the property. These need a considerable investment upfront.

The percentage of how much you gain or lose vs. how much you invest. Since it's a percentage, it allows you to compare investments quickly. In general, a higher ROI is better. 

Think of it as the average ROI over a period of time. The AAR is what you'll earn on average each year of the investment. Another perk of this metric is that it helps compare other investments beyond real estate. 

The IRR is similar to the AAR but also accounts for the value of time. A higher IRR percentage is better, but it's usually a little lower than the AAR because it factors in the passage of time, which reduces the investment's value. 

Like any industry, there are special terms that are helpful to know. Here are some of the most common ones in plain English. Bookmark to reference later.

Clear and Concise Real Estate Syndication Terms and Definitions

White House Blueprint For A Renters Bill Of Rights

I tend to favor rules that promote personal freedom coupled with personal responsibility. I believe that provides the best environment for people to thrive. But guardrails are also necessary, especially for the neediest in society. I also think affordable housing is an issue, especially for the most impoverished.

Despite how much I agree - and am already implementing - with the blueprint, I also think the root cause of housing issues isn't directly related to housing (I'll share what is at the end). So despite this new blueprint's well-meaning, I don't think 

 focused solely on housing will have the intended consequences.

Putting aside my general philosophy, evaluating its impact on our management operations is still good. Let's dive in.

The goal is to provide "access to safe, quality, accessible, and affordable housing" with "clear and fair leases."

I love both of these goals. I think they're both vital. That's why I thoroughly clean, and repair units before someone moves in. Now, do I rehab them to be brand new inside? No, but they're clean, in good condition, and available for anyone who meets my criteria.

I also think having clear and fair leases is a great goal. I use the same standard lease as all other professional landlords in Oregon, but they're not as straightforward as I would like. To overcome this, I made a video that goes through the lease and explains it. That way, when my new residents sign it, they know what they're signing. This is especially important in the age of DocuSign, which scrolls straight to the signature parts.

I think leases are complicated because of all the nuanced tenant-landlord laws. I haven't gone deep enough into this new blueprint, but it would be great if it simplified the contractual relationship. I'd probably still make a video because I want everyone to know what they're signing.


Around half of renters spend more than 30% of their income on rent and utilities

. All of my residents are in the second half. I've run "experiments" to see what people can afford. I did it mainly because I'd have people 

 to rent one of my places, and to be accommodating, I'd let them. Here's what I learned:

If someone spends 50% of their income on rent, they'll fall behind within the first six months. They can't also pay for cars, food, clothes, phones, entertainment, etc. It requires too strict budgeting. Every tenant left with a significant outstanding bill. Did I pursue or evict them? No. But I'd explain that my place was probably not the right fit for their budget. "We tried, but it's not working."

What about 40%? This was an interesting one because it's right on the edge. As long as life was perfect, they paid on time. They could even handle one small emergency. But when the car broke, and the cat had to go to the vet (true story), they were late.

They'd catch up mid-month. But things would be super tight for the next few months.

It's just not enough of a buffer in the budget. And it takes a tremendous amount of discipline to say, "I like this place, so I'm going to sacrifice some living expenses on my already smaller budget to afford it." It's more discipline than I have, at least.

One resident in this situation always kept the unit's temperature in the upper 70s with a cable package and smartphone (in 2010, before 

 had one). I lived on the other side of the duplex, and his utilities were double mine (and I didn't have a TV). I'll admit that I struggled to sympathize when he said he would be late on his rent. I know that's not every tenant, but my point is that it takes an almost unachievable amount of discipline to live below your means when your income isn't super high.

30% of income on housing seems to be about right in my experience. It's enough to spend and save.

I evicted one person. I was new and didn't know any better. I haven't evicted anyone since then.

My secret: I don't read landlord books. Instead, I read 

. The best approach is to realize each resident is a fellow human made in God's image. They're just as valuable (and broken) as you are. Once you care for someone, you want what's best for them. That includes treating them how you want to be treated by setting clear & fair boundaries.

By the way, parenting books also work for friends and co-workers because they teach you how to interact with everyone in a caring manner.

So, whenever I have an issue, I honestly talk with them. I explain why their behavior is a problem and reiterate my expectations. When I terminate a contract, it's for 30 days (same as the blueprint's proposal) because 

 would want enough time to find a new place. I'm regularly shocked as I collect their keys when they thank me for being patient and fair.

I typically lose ~$500 in the process, but it's the right thing to do.

Oh, and I rarely ever charge a late fee. I mean, they're already struggling financially. Why pile on?


In 2019 Oregon introduced rent caps. I sat in multiple meetings where fellow landlords and property managers fretted over it.

Me? I'm neutral, but I've always been slow to increase existing tenants' rent. The cost of a turnover is so high I don't want to rock the boat that much. Plus, I underwrote the purchase using a lower rent anyways, so I'm still making my expected return (

Plus, the last few years proved, statically, that rent caps don't work. The average rent 

When rent caps started, construction projects slowed down, reducing inventory. So, when I have a rental posted, I get at least 10 applicants within the first 4 hours. It's kind of crazy. When supply is that much greater than demand, I can almost set my price to anything I want. Apparently, 46% higher, on average (probably more, since that statistic includes people who didn't move).

And anyone who doesn't move gets the maximum rent increase. What are they going to do? Move? If they can find a vacancy (they can't), they'll pay waaay more than the rent increase.

I'm not saying it's right (I didn't increase any of mine by 46%), but that's what's happening. Rent caps made the housing situation worst, not better. It's a perfect example of unintended consequences. Lawmakers assumed a static housing market, but it's dynamic.

I suppose lawmakers could create a law that caps rent increases 

 tenants. That sounds like an enforcement nightmare, but more importantly, that dramatically reduces everyone's incentive to repair and improve a rental.

, Matthew Desmond advocates significantly increasing HUD's budget. That way, more people can get financial help (a rent subsidy), and investors are still incentivized to build and improve their units. I, obviously, like the way that sounds, but there's an almost certainty that rents will skyrocket the same way college tuition has.

In the end, the root of the problem isn't housing affordability; it's a symptom. When you try to stop the symptom, it often creates side effects.

The problem is a lack of caring for each other:

Jesus answered, "The most important is, 'Hear, O Israel: The Lord our God, the Lord is one. And you shall love the Lord your God with all your heart and with all your soul and with all your mind and with all your strength.' The second is this: 'You shall love your neighbor as yourself.' There is no other commandment greater than these." 

Not only is our society turning away from God (and a shared definition of right and wrong), but we're turning away from each other. We're trying to maximize our own lives at the expense of others. Sadly, it results in less for everyone. Until our hearts are changed, blueprints like these are an ineffective bandaid. Instead, lawmakers should focus on rules that foster community.

More immediately, in my initial reading of the blueprint, I'm OK with it. The goals are great, and I'm already doing much of what they want. Bring it on. Besides, we'll see lots of properties become available as less caring operators fail to meet the new expectations and want out.

Those of us who are willing to care for others while making a reasonable return will do great and be able to bless many people.

An Oregon landlord's opinion on the White House Blueprint For A Renters Bill Of Rights – it's probably not what you expect.

Why I'm Actually Fine with the Blueprint For a Renters Bill of Rights

It can be overwhelming when you start evaluating real estate deals. That's especially true if you're stepping in as a Limited Partner without prior personal investing experience. You're relying heavily on the Operator and their due diligence - trust is vital! To build that trust, it helps to know 6 key performance indicators (KPIs) when investing in multifamily real estate. That gives you the knowledge and confidence to spot a good deal that aligns with your investment goals.

What follows are those 6 KPIs, plus 4 bonus qualitative KPIs to consider. You don't need to master calculating each of these. Instead, focus on understanding what they represent so you'll recognize them when you see them in a 

Your ROI is the fundamental metric that the other KPIs build off. It's a percentage of how much you gain or lose vs. how much you invest. Since it's a percentage, it allows you to compare investments quickly. And in general, a higher ROI is better. I tend to think of the equation this way:

For completeness' sake, here's the official equation:

Sure, earning $20K is twice as much, but you had to invest 4 times as much to get it. In ROI terms, that's a 10% vs. 5% return.

Maximizing your ROI, within reason, is the goal. However, there are some shortcomings, the biggest of which is that it doesn't take into account time. Let's say you have two investments of $100K that earn $10K each, but one takes 1 year, and the other takes 5 years. Both have the same ROI ($10K / 100K = 10%), but the 1-year investment is clearly preferred.

So, even though this is the most fundamental metric, unless you're only looking at one year, it's usually skipped in favor of the following metric.

The AAR is perhaps the most relatable metric since stocks and index/mutual funds regularly report it. Think of it as the average ROI over a period of time.

The AAR is what you'll actually earn on average each year of the investment. Another perk of this metric is that it helps make comparisons to other investments beyond real estate.

One shortcoming of the AAR is that it doesn't consider the 

 of time, where a dollar earned today is more valuable than a dollar earned in 5 years. Thankfully, the IRR does.

The IRR is the most useful metric when evaluating multifamily real estate, but it's also the hardest to explain and calculate (without Excel).

In layman's terms, the IRR is similar to the AAR, but it accounts for the value of time. A higher IRR percentage is better, but it's usually a little lower than the AAR because it's factoring in the passage of time, which reduces the investment's value.

In technical terms, the IRR is the annual effective compounded return rate that makes the Net Present Value (NPV) equal to zero.

The NPV finds today's value of a future income stream using a "proper discount rate." Projects with a positive NPV are worth doing, while those with a negative NPV are not. A bigger discount rate makes the NPV smaller because it's basically saying: a higher rate from an alternative investment is "better." Hence, the future income stream must also be "better" to generate an equivalent NPV. Here's the equation:

) is in the denominator, so as it gets bigger, the NPV gets smaller. Furthermore, the denominator gets exponentially larger in each new time period 

, meaning income further in the future is worth less; that's the value of time.

All this begs the question: what is the "proper discount rate?" Or, what's the proper alternative investment to compare? You might think it's inflation, a "safe" alternative like T-Bills, or a popular index fund.

The IRR side steps this question. Instead of choosing an alternative, it asks: what would that discount rate have to be to make the NPV zero? If we solve for a zero NPV on all investments, we can directly compare each investment via the discount rate. The investment with a higher discount rate must be "better" because it means it's a "better alternative investment."

Calculating this by hand is a beast, but thanks to Excel, it's easy to do with the function XIRR(cash flows, dates, guess). Just make sure to include the initial investment in the cash flows.

Hopefully, now you can see why it's useful (but hard to understand).

The ROI is the total percentage return. It doesn't account for time, so it's best for 1-year comparisons.

The AAR is the average annual percentage return. This is what you'll actually receive (in percentage terms) over time.

The IRR allows you to compare investments while considering the value of time.

So far, we've been looking at the overall returns, but there are two sources of return in real estate:

income from cash flow (think of it as dividends), and

income from a refinance or sale (think of it as the value of the asset itself)

The COC is the income from cash flows only as a percentage of your invested amount. This is the average return you can expect during the holding period. It usually starts low and grows over time as improvements are completed (and rents increase).

Only looking at the income from cash flows helps you understand the mix of the overall returns and how it aligns with your investment goals. I suppose there could be a "Return of Net Proceeds," which you'd add to COC to get the total return, but that typically isn't looked at.


The EM is simple to calculate and understand. Instead of a percentage that's primarily useful for comparing deals, EM answers the question, "If I invest a dollar, how many dollars will I get back from the investment?"

Unlike the other metrics, this feels more real and tangible. If you've ever heard a venture capitalist talk about earning 5x or 10x(!) from their investments, they're talking about the equity multiple.

I like to express the EM in dollars because it's even easier to understand. Suppose the investment has a 1.82 EM. I won't say, "It's a 1.82 EM." Instead, I'll say, "For every $100K invested, you'll earn $82K."

If you think that looks suspiciously similar to the ROI, you're right! It's simply a different way of expressing the same metric.


The Cap Rate is a ratio between the annual net operating income (NOI) and the price of the property.

It helps determine the relative value of a property's income after operating expenses. It excludes financing, but that's still helpful since there are many ways to finance a property. Think of it as the inverse of the price-to-earnings (P/E) ratio of a company's stock.

This next part can be a little counter-intuitive, but ideally, you purchase the property at a 

 Cap Rate (though my underwriting assumes that the market Cap Rates will expand (increase) in the future). That's because a 

 for the property's income. Conversely, when selling, you want the new buyer to pay more for the property's income (a larger denominator in the ratio), so you want a 

I remember the first time I heard someone talk about the Cap Rate. At the time, I compared investments using the 

 (the monthly rent should be at least 1% of the purchase price. So a $100K house ideally rents for at least $1,000 a month). The 1% Rule is such a helpful rule of thumb for small properties that I didn't understand why anyone would use a more complicated metric like the Cap Rate when quickly assessing properties.

However, over time, I've come to appreciate it. I'm slightly annoyed that the percentage is inversely related to the value of a 

. So, in my head, I think of it more as the value of the 

The Cap Rate is only useful for comparing properties (there's no direct relationship to IRR), but I like that it factors for operating expenses, so now I regularly use it for larger properties. That, and everyone else in the industry uses it, so it's practical when negotiating a purchase.

It's also helpful to predict the value of improvements. If the market is trading at a 6% Cap. Then you know that an increase of $1,200 to the NOI (from, say, a $100/month rent increase) just increased the value of the property by $20,000. It's only paper wealth until you refinance or sell, but it helps with planning.

If Cap Rates are compressed in a market. Let's say, to 4%. That same rent increase bumps the property's value up by $30,000! If Cap Rates start expanding, it's time to seriously consider selling (unless you still have value to add to the property to force appreciation via an improved NOI).

Overall, it's pretty helpful in driving decisions. Investors who can accurately track and predict the market's Cap Rate have a considerable advantage.


These key performance indicators give limited partners the knowledge and confidence to spot a good deal that aligns with their investment goals.

Writing on real estate, company building, and the multifamily industry.