- Joined
- Dec 5, 2007
- Messages
- 2,880
Hi All,
I wanted to share a formula I developed with you to help make real estate investment decisions. It`s your ROI as a function of the CAP Rate, mortgage interest and your down payment:
ROI = [(CAP-i)/d] + i
ROI - Return on investment including mortgage principal paid not including any appreciation.
CAP (CAP Rate) - Ratio between cash flow and purchase price(%). Interest expenses are excluded, in other words CAP rate does not depend on the amount of debt used to purchase the property
i – mortgage interest (%)
d – down payment (%)
The formula shows how a positive ROI depends on the CAP rate being higher than the mortgage interest. ROI is sensitive to changes in mortgage interest and while I prefer variable rate, a CAP rate too close to your interest is a sign of low cash flow or risk of negative cash flow. From the formula you can also see how putting down half the amount you intended to, almost doubles your ROI(!) (not considering mortgage insurance premium however)
Regards,
Neil
I wanted to share a formula I developed with you to help make real estate investment decisions. It`s your ROI as a function of the CAP Rate, mortgage interest and your down payment:
ROI = [(CAP-i)/d] + i
ROI - Return on investment including mortgage principal paid not including any appreciation.
CAP (CAP Rate) - Ratio between cash flow and purchase price(%). Interest expenses are excluded, in other words CAP rate does not depend on the amount of debt used to purchase the property
i – mortgage interest (%)
d – down payment (%)
The formula shows how a positive ROI depends on the CAP rate being higher than the mortgage interest. ROI is sensitive to changes in mortgage interest and while I prefer variable rate, a CAP rate too close to your interest is a sign of low cash flow or risk of negative cash flow. From the formula you can also see how putting down half the amount you intended to, almost doubles your ROI(!) (not considering mortgage insurance premium however)
Regards,
Neil