Maximizing Long Term Value of Investment
There are several numeric factors which will largely control the long term value of any investment.
The salient ones are PURCHASE PRICE, NET OPERATING INCOME, COST OF DEBT, AND GROWTH RATE OF VALUE OF PROPERTY.
The biggest mistake most inexperienced real estate investors make is to think only of PURCHASE PRICE. They are obsessed with trying to pick up a property, any property, at the greatest discount from apparent present market value.
Obviously, paying less rather than paying more at day one is good.
What really matters though is the (1) THE PRESENT VALUE OF THE PROPERTY WHEN YOU SELL IT; ADDED TO (2) THE TOTAL PRESENT VALUE OF THE MONEY YOU TOOK OUT OF THE PROPERTY WHILE YOU OWNED IT.
The underlying reality of all investing is that GROWTH RATES COMPOUND GEOMETRICALLY.? This is true of corporate earnings, dividends, increases in real estate values, increases in rents.??GROWTH RATE of rents and value (whcih end to go ahnd n ahnd of course) IS BY FAR THE MOST IMPORTANT PARAMETER.
Low interest expense is important proportionate to leverage.? If your loan to value on a property is only 10%, the interest rate just does not matter much.? If your LTV is 100%, the interest rate on your mortgage in year one is just as important as your current NOI. However in year two presumably the NOI starts to grow while the debt service remains essentially the same.
To the extent that these numbers increase at a greater rate than expenses,? profits grow enormously over a period of time. Profits will in fact increase as long as the growth rate of expenses does not exceed the growth rate of income,
领英推荐
Breaking even or making a profit on day one is just not that important as long as you are able to pay the mortgage.
What you paid for the property is largely irrelevant unless you have to sell it!!!
WHAT IS MOST IMPORTANT IN ALL INVESTMENT DECISIONS IS KEEPING THE LARGEST AMOUNT OF MONEY WORKING FOR YOU AT THE HIGHEST GROWTH RATE.
Saving a few dollars on the initial purchase price is important only to the extent that you can reasonably quickly invest these savings somewhere else. THESE FEW DOLLARS ARE RARELY WORTH LOSING A GOOD LONG TERM INVESTMENT RATE OF RETURN.
On the other hand a good long term investment is worth nothing if you re forced to sell it. STAYING INVESTED IS JUST AS IMPORTANT AS INVESTMENT SELECTION.
Selling a high growth long term investment is almost always a mistake.
If you have not already done it you should set up a spread sheet to model these assumptions over various? periods of time.
You will be astonished by the power of compounding.