Hi monkeys,
sorry if this question may seem very basic...I want to ask you which is the easiest way to calculate with a simple formula the yield's changes of a RE investment when I change the debt/equity ratio?
For example, if an investment's yield is equal to 10%, if we have 50% debt, with lets say 5% of interests, what will be the total return of the investment?
Thanks a lot
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Anyone here?
Say $100 investment pays $10 dividend when 100% equity for a 10% yield. If you lever 50% at 5% interest you will pay $2.50 in interest but receive a tax shield. So your yield should be ($10-($2.5x(1-tax rate)))/($100x50%). For TSR (Appreciation+$10-($2.5x(1-tax rate)))/($100x50%).
TSR?
Thanks a lot!
Is it the only method to calculate it?
Not sure, this is how I have always done it.
Most private investment shops look at real estate yields pre-personal/corporate income taxes (investors should consult their own accountants, etc.), so everything he said is correct, but generally the yield on an investment will not factor in the tax shield.
I typically do (yield on cost - cost of debt)x(debt/equity) + yield on cost
So for your example it would be (10%-5%) x (50%/50%) + 10%
So 15% COC
Yield is not impact by leverage, so typically total yield will remain constant as it is the cash flow that should be available to all investors in the capital stack. NOI/Total cost.
Cash on cash is the return to equity holders, which will be NOI less interest / equity.
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