First off Mr. Real World, you are assuming a 100% financed deal. Financing terms can make or break a deal – if we are not both not speaking about the same loan terms (i.e. LTV, term, interest rate, etc), then we could be debating this endlessly.
Once again, your numbers are hypothetical; these numbers are actual. Using the loan product we’re currently using, debt service is $14,758…
You typically want to use the right loan product for the job (i.e. if your hold period were 2 years, you may not want to pay the additional cost to get a 30yr fixed rate loan).
Once again, you use hypothetical numbers and inappropriate loan products that make this deal look poor. However, with the
actual numbers being used on the project, the property cash flows just fine. You also fail to include the expense allocation which dramatically increases the cash flow (along with other benefits described in the previous post).
You go on to say:
You're absolutely right. You could plug in a bunch of "unrealistic" assumptions into an IRR calculation. After all, you can't calculate IRR without assumptions. Know what our pro forma rent income escalator assumption was? 11%. In 3 months, do you know what the
actual rental increase has been? About
25%. Oops, we were too conservative in our assumptions. Oh well! Perhaps our 31% estimated IRR was also too conservative!
Finally, if we assume no further rental increases through the holding period (which seems unlikely given that rents always go up in San Diego), we have increased the value of the building to $4,753,829... that is a gain in building value of
$1,218,829! I have a feeling you have a hard time accepting that apartments in SoCal trade at low cap rates, but that is exactly what happens. And as much as you moan and complain about "investors" buying these "terrible" properties at low cap rates, it happens. Even if we traded the building at a discount, we will trade the building for a capital gain of at least a
million dollars in 2 short years. You buy any houses recently that allow you to do that?
