Rate of Return in investment property

[Francis Dinh]

Hello,

I am in the contract of a house in Rockwall, Texas (Dallas area). I run the rate of return online and this is what I get. Please advice me anything you know, I appreciate that. I am a new guy, this is my first investment property. 

[Llewelyn A.]

@Jason D.

I totally get what you are saying. But the Geek in me wants to bring the analysis out a bit further. Here is a spreadsheet I whipped up for reference:

Given the assumptions of 3% Rental increase and 3% Expense Increases, you are absolutely correct, it breaks even by year 13 as you can see in column T.

However, I wanted to see how the monthly Cash Flow will be affected. You can see that every year, the monthly cash flow decreases and gets much more affordable. I know a lot of people may say that a $200 loss per year is unacceptable, but now lets take it a bit further.

Let's look at the fact that he has a 20 year mortgage.

In Row 22, I computed the Balances after each year.

In Row 23, I computed the Equity based on ZERO Appreciation... meaning no increase in Value over the years. However, that does not mean he is not building equity. This row gives you the CUMULATIVE Increase in Equity.

In Row 24, I computed the Equity that was gained from the Original Mortgage of $196k (based on the $245k at an LTV of 80%). So Year 1 Gain of $6,673 is Equal to $196k original balance minus $189,327 new Balance after 12 payments.

In Row 25, I took each 12 month period and I computed the gain on average per month. You can see it's increasing nicely.

So... there are two things that are happening here.

1) His Monthly Cash Flow is getting More positive (or less Negative)

2) He is building Equity Faster via Mortgage Reduction

The Bottom Line is Row 26.

I take the Monthly Cash Flow and add it to the Monthly Equity Gain via the Mortgage Reduction.

You can see that it starts out at $209 per month and by year 13 it's at $877 per month.

This all assumes NO APPRECIATION.

I'm not trying to say I'm right or your wrong. I'm just putting out the Analysis so the readers of this post can see that while one can say it's a negative cash flow property for 12 years, he breaks even on the 13th year, all with no assumption of appreciation.

If there were appreciation, an annualized appreciation rate of 3% per year, which really is low even nationally, is really conservative.

I thought since he gave the numbers, that this was a good exercise for anyone interested to see in more details.

I perform this kind of analysis normally so I can get a 10 or 20 year vision on the Investment.

This kind of analysis also serves as a pro-forma business plan which helps others decide if they want to invest with you.

If it can be explained in detail, this can help your business if you are recruiting partners.

They get the bottom line, which is a negative cash flow for 13 years but the cash flow losses decrease each year. They get equity build up every year. And, if there is an assumed 3% Appreciation Rate, the over all return is 9.24% per year as if it was a Savings Account.

It's better to do this deal than to keep your money in a Savings or Checking Account earning virtually zero interest.

Just food for thought!