- Joined
- Aug 26, 2010
- Messages
- 380
I've often heard it said the fundamental is the spread between borrowing and cap rate on multi family. How would the math work?
assume 2 million $ purchase of building generating 20K gross rents in smaller community at a 6.75 cap
85 % CMHC mortgage of 1 700 000 at 1.75 % rate = monthly payment of 8750
This is a 500 basis point spread between cap rate return and borrowing cost which is huge ... but how would the math work?
At 6.75 cap working the typical math backwards on a 2 million $ deal that makes the NOI 11250 which would give an expense ratio of 43.75 %, which isn't out of line with for example a bldg where tenants pay lights but water and heat is included... but I don't really know how or what the quick and dirty equation is to figure out return based on the spread between cap rate and mortgage rate.
Is it that for each million of mortgage $$ borrowed that you are making 50K (500 basis points or 5 % X 1 000 000) per year in cashflow not counting paydown?
Thanks, input from the heavy hitters appreciated.
assume 2 million $ purchase of building generating 20K gross rents in smaller community at a 6.75 cap
85 % CMHC mortgage of 1 700 000 at 1.75 % rate = monthly payment of 8750
This is a 500 basis point spread between cap rate return and borrowing cost which is huge ... but how would the math work?
At 6.75 cap working the typical math backwards on a 2 million $ deal that makes the NOI 11250 which would give an expense ratio of 43.75 %, which isn't out of line with for example a bldg where tenants pay lights but water and heat is included... but I don't really know how or what the quick and dirty equation is to figure out return based on the spread between cap rate and mortgage rate.
Is it that for each million of mortgage $$ borrowed that you are making 50K (500 basis points or 5 % X 1 000 000) per year in cashflow not counting paydown?
Thanks, input from the heavy hitters appreciated.