Welcome!

By registering with us, you'll be able to discuss, share and private message with other members of our community.

SignUp Now!

Mortgage Calculation

David Chien

0
Registered
Joined
Feb 25, 2009
Messages
67
Hello there: During one of the REIN meeting, the speaker mentioned that even if the property does not appreciate over a period of time,(which means the property value stay flat) but through the mortgage paydown, there is still a 6-7 % return on initial downpayment. Can someone enlighten me on the calculation. Thanks in advance!
 

Michel Lafleur

Frequent Forum Member
REIN Member
Joined
Apr 30, 2015
Messages
205
There are a few numbers in the equations that can alter your returns, but here's a sample calculation.

Purchase price $350k. 20% down ($70k) + $280k new mortgage. For the example lets say the mortgage is fixed interest @ 3.5%, 5 year term (60 monthly payments) and 25 year amortization.
After 5 years of mortgage payments you will have paid ~$39k in principal + ~$45k in interest.
After 10 years the payments of principal & interest are comparable at ~$84k each.

If you held for 5 years and had ~$39k principal pay down = ~$5571/year. $5571/$70,000 = 7.96% annual (return on initial down payment).
If you held for 10 years and had ~$84k principal pay down = ~$8400/year. $8400/$70,000 = 12% annual (return on down payment.)
These returns are based on zero net new investment over the 5 or 10 year holding period (repairs & maintenance, renovations etc.)
This portion is only based on mortgage pay down and has nothing to do with monthly cashflow or vacancy rates.

There are other costs to consider as well (such as Realtor & legal fees when its time to sell), repairs/maintenance, but this should give you an idea of how the several % return on initial investment could be calculated assuming no property appreciation over time.
 

Thomas Beyer

0
REIN Member
Joined
Aug 30, 2007
Messages
13,881
What is better: Cash-Flow or Maximum ROI ? http://myreinspace.com/threads/what-is-better-cash-flow-or-higher-roi.26596/
Cash-flow does NOT make you rich, but it allows a sustained ownership. Appreciation and mortgage paydown (by others) is where you get wealthy.

It’s like a three course meal !

You may skip the dessert ( appreciation) and appetizer (cash-flow) but the main course, mortgage paydown, will make you wealthy, in time.

If you buy with 25% down, say a $400,000 house with $100,000 invested, the 300k mortgage is down about 40-45,000 in 5 years do a 40-45% ROI or 8-9%/yr in a flat market with no cash-flow.
 

David Chien

0
Registered
Joined
Feb 25, 2009
Messages
67
Michael: Thank you for your detail explanation to enlighten my thinking.

Thomas: thank you for posing this Real Estate Wealth Cumulation from a different angle.

Wish they taught this in high school or University in addition to saving and put money in a saving account for retirement.
 

Matt Crowley

0
REIN Member
Joined
Dec 14, 2013
Messages
980
Wrong.

The down payment grows at the rate of the mortgage. If you don't sell than you can access that capital.

The rest is just a mistake in calculations.
 
Top Bottom