Pricing Information and Estimated Rates of Return
In recent years, we have found that appraisers and lenders have been much more likely to value rental property as they would any other business. Please disregard the following if you are already familiar with income-approach real estate valuation.
Total Return on Investment Examples at 5 & 10 years
The following examples are hypothetical and may not be applicable in all cases. We suggest that you consult your financial/legal professional with any questions regarding individual circumstances.
Listed prices for all properties for sale are based primarily on an “income–approach valuation,” and are calculated to yield an estimated 19-25% (min) “cash-on-cash” annual returns*, depending your management expenses (owner/manager versus professional property management, and other factors).
Please Note: The following are hypothetical examples of returns on rental property investments, assuming property sales after 5 years and after 10 years, respectively.
Assumptions based on the following hypothetical rental property investment:
Sales Price: $400,000
– $100,000 down payment (25%)
– $300,000 loan, 75% LTV, 4% APR, 25 year amortization
– 20% annual cash-on-cash return
– 3% annual increase in rents
– 1.5% annual appreciation on value and equity
Principal Reduction (Increased Ownership Equity Over Time):
At 5 Years, Principal Balance: $261,313. Owners Equity: $36,687
At 10 years, Principal Balance: $214,078. Owners Equity: $85,922
- $100,000 * 1.23^5 (20% annual return & 3% rent increase compounded over 5 years) = $281,530
B. $36,687 * 1.015^5 (Increased equity at 1.5% appreciation compounded over 5 years) = $39,522
C. $400,000 * 1.015^5 (Value at 1.5% appreciation compounded over 5 years) = $430,913
D. Principal balance at the end of 5 years: $261,313
(A + B + C – D) = $490,653
Estimated Equity/Net Worth, Assuming Property Is Sold in Five Years:
$490,653 / $100,000 = 490.65% Total Return Over 5 Years
10 year calculations:
- $100,000 * 1.23^10 (20% annual return & 3% rent increase compounded over 10 years) = $792,594
B. $85,922 * 1.015^10 (Increased equity at 1.5% appreciation compounded over 10 years) = $95,562
C. $400,000 * 1.015^10 (Value at 1.5% appreciation compounded over 10 years) = $464,216
D. Principal balance at the end of 10 years: $214,078
(A + B + C – D) = $1,135,295
Estimated Equity/Net Worth, Assuming Property Is Sold in Ten Years:
$1,135,295 / $100,000 = 1135.29% Total Return Over 10 Years
*Cash-on-cash returns are the estimated returns a property owner may derive from actual “out-of-pocket” investment, assuming the property is financed at a 4% annual rate of interest, 25% down payment (of the sale price), with a mortgage amortized over 25 years. Estimated interest payments, not including principle, are used in calculations. You may be able to obtain more or less favorable financing terms.
**Tax savings are another important advantage of real estate investing.
I hope the preceding information has been useful. Please feel me to contact me at Scott@wsyou.com or 507-454-4444 for questions, or to set up a viewing of any of the properties.
Thank you for your interest.
Scott Hanson, President
Bluff City Properties, LLC