The last assumption is borderline ludicrous. During the last 20 years, only one of the 500 biggest cities in the United States has failed to appreciate in value (Flint, MI). And the 2008 Housing Crisis occurred during that time. Even still, if you were simply to hold a property with a 20-year loan for the entire 20 years with no cash flow (the rent paying only for all property-related expenses) and no appreciation, the rate of return is pretty good. Using the CCIM Financial Calculator, we see the following:
There are some caveats here. For one, early in a loan, most of the payment goes to interest and then as you progress deeper into the loan, it switches and most of each payment goes to the principal as the following example shows:
PAYMENT
500
400
ANNUALNPVAND IRR CALCULATIONS
Holding Period (Years)
20
300
EOY
Cash Flows
+
Sale Proceeds
200
($20,000)
0 1 2 3 4 5 6 7 8 9
100
Year 2023 25 27 29 31 33 35 37 39 2041
Interest Principal
Therefore, if you pay off the loan early, the IRR will be less. In addition, if the loan is a 30-year amortization as many are, the IRR will be less too (although the cashflow will be higher). But remember, this is a 7.18 percent return with no cashflow, no appreciation, no tax benefits and settling to buy at market prices. Add those other benefits in and the rate of return goes up and up. The power of principal paydown is another reason why it’s not a good idea to sit on the sidelines and wait for a correction just because you think (rightly or wrongly) the market is near its peak. Sure, it’s important to be care- ful in a hot market like this one. But there are so many advantages to real estate outside of appreciation (princi - pal paydown being one of the most important and least discussed) that you shouldn’t just twiddle your thumbs and wait for a crash that may or may not come at a time no one can really predict. • Andrew Syrios has been investing in real estate for over a decade and is a partner with Stewardship Investments, LLC along with his brother Phillip and father Bill. Stewardship Investments focuses on buy and hold and particularly the BRRRR strategy—buying, rehabbing, and renting out houses and apartments throughout the Kansas City area. Today, Stewardship Investments has over 300 properties and 500 units. He writes for Think Realty, BiggerPockets and The Data Driven Investor.
10 11 12 13 14 15 16 17 18 19 20
+
$80,000
NPV Discount Rate Net Present Value Internal Rate of Return
7.18%
7.18 percent may not sound incredible, but it’s not bad at all. Indeed, as Nerd Wallet reports, the average return in the stock market is just 10 percent. So the stock mar- ket barely beats principal paydown with none of the other real estate-related advantages!
thinkrealty . com | 59
Made with FlippingBook Online newsletter