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- Aug 30, 2007
- Messages
- 13,881
QUOTE (investmart @ Aug 15 2009, 06:25 PM)
...
Thomas, just plug in 10% down instead of the higher % you put down on your own apartment buildings, and you will also get ROI>36%.
...
indeed .. with the comment that 2.5% interest is an unrealistic figure to use .. more like: 4% or 4.5% .. then it won't be so sexy assuming no appreciation ..
2nd comment: the formula assumes no reserve which is also unrealistic !
I use this formula:
(CAP - i + a) / (d + r) ..
where
CAP is CAP rate
i is interest rate
a is appreciation (on average over a 5 or 10 year term)
d is downpayment % (% of purchase price) .. usually 20-25% these days on a multi
r is a % of purchase price .. say 5% as a decent rule of thumb
Example 1 (rising market, like BC, SK or AB:
CAP rate 6%
interest rate = 4%
down payment = 20%
reserve = 5%
ROI is
(6% - 4%) / ( 20% + 5%) = 2% / 25% = 8% assuming no appreciation
or
(6% - 4%+4%) / ( 20% + 5%) = 6% / 25% = 24% assuming 4% appreciation
or
(6% - 4%+6%) / ( 20% + 5%) = 8% / 25% = 32% assuming 6% appreciation
Example 2 (flat market, like ON or Europe):
CAP rate 8%
interest rate = 4%
down payment = 20%
reserve = 5%
ROI is
(8% - 4%) / ( 20% + 5%) = 4% / 25% = 16% assuming no appreciation
or
(8% - 4%-2%) / ( 20% + 5%) = 2% / 25% = 8% assuming -2% decline
or
(8% - 4%+2%) / ( 20% + 5%) = 6% / 25% = 24% assuming 2% inflationary appreciation
The key factor is often the going in CAP rate which must be higher in a flat market like Ontario than in a growth market like W-Canada or TX .. but often is not .. or shall I say: not yet !
So even in a flat market you can make decent money if the going in CAP rate is high enough, in other words the asset price is low enough !
more thoughts here and more results of using this formula in flat, rising or falling markets, i..e equity gain not the only way to make money in RE: http://myreinspace.com/public_forums1/Real_Estate_Discussion/62-10711-Equity_is_not_the_only_way_to_make_money_in_real_estate.html
...
Thomas, just plug in 10% down instead of the higher % you put down on your own apartment buildings, and you will also get ROI>36%.
...
indeed .. with the comment that 2.5% interest is an unrealistic figure to use .. more like: 4% or 4.5% .. then it won't be so sexy assuming no appreciation ..
2nd comment: the formula assumes no reserve which is also unrealistic !
I use this formula:
(CAP - i + a) / (d + r) ..
where
CAP is CAP rate
i is interest rate
a is appreciation (on average over a 5 or 10 year term)
d is downpayment % (% of purchase price) .. usually 20-25% these days on a multi
r is a % of purchase price .. say 5% as a decent rule of thumb
Example 1 (rising market, like BC, SK or AB:
CAP rate 6%
interest rate = 4%
down payment = 20%
reserve = 5%
ROI is
(6% - 4%) / ( 20% + 5%) = 2% / 25% = 8% assuming no appreciation
or
(6% - 4%+4%) / ( 20% + 5%) = 6% / 25% = 24% assuming 4% appreciation
or
(6% - 4%+6%) / ( 20% + 5%) = 8% / 25% = 32% assuming 6% appreciation
Example 2 (flat market, like ON or Europe):
CAP rate 8%
interest rate = 4%
down payment = 20%
reserve = 5%
ROI is
(8% - 4%) / ( 20% + 5%) = 4% / 25% = 16% assuming no appreciation
or
(8% - 4%-2%) / ( 20% + 5%) = 2% / 25% = 8% assuming -2% decline
or
(8% - 4%+2%) / ( 20% + 5%) = 6% / 25% = 24% assuming 2% inflationary appreciation
The key factor is often the going in CAP rate which must be higher in a flat market like Ontario than in a growth market like W-Canada or TX .. but often is not .. or shall I say: not yet !
So even in a flat market you can make decent money if the going in CAP rate is high enough, in other words the asset price is low enough !
more thoughts here and more results of using this formula in flat, rising or falling markets, i..e equity gain not the only way to make money in RE: http://myreinspace.com/public_forums1/Real_Estate_Discussion/62-10711-Equity_is_not_the_only_way_to_make_money_in_real_estate.html