Projecting Appreciation Rate

[OlegP]

I invest in South Western Ontario. I have been working on a few deals - a townhouse complex and a 9-plex. In the deal summary for the potential JV partner, I set the appreciation rate at 5% per year for 5 years. However, given the thread of events from federal government changes to the upcoming HST and the expected interest rate increases, I am wondering if 5% in Year 1 and even Year 2 are a bit aggressive.

What do investors as projections for the next 5 years?

Thanks.
Oleg

 

[Nir]

Hi Oleg,

I find JV partners appreciate a conservative approach more. it is more reliable.
if it`s a good deal then the 9-plex will generate great returns even before appreciation.
just calculate and show your partner the following: CAP, monthly net income and the monthly principle reduction (money on paper) - all significantly more "guaranteed" than appreciation.
again, if it`s a good deal, numbers will be great before appreciation. then of course make it clear and mention something like "any appreciation, which is expected, will make even more money for us. However I prefer the conservative approach of seeing appreciation as a nice bonus when we sell in the future. I am not into speculations, therefore I only buy properties that generate great return even with zero appreciation!".

Good luck,
Neil

 

[housingrental]

I like Neil`s post
I`d think it`d be a good idea to show a few scenario`s - ie flat market, 1% per year depreciation, 3% appreciation, actual appreciation of town in last 5 years.

 

[invst4profit]

Generally you should not be overly aggressive with your projection of appreciation although grandiose numbers are often common in real estate sales pitches.
Historically you can not expect much more than the yearly inflation rate in regards to appreciation..

 

[OlegP]

QUOTE (invst4profit @ Apr 3 2010, 10:56 AM) Generally you should not be overly aggressive with your projection of appreciation although grandiose numbers are often common in real estate sales pitches.
Historically you can not expect much more than the yearly inflation rate in regards to appreciation..


Thank you, gentlemen! I will adjust my presentation accordingly.

 

[Thomas Beyer]

QUOTE (housingrental @ Apr 3 2010, 08:36 AM) I like Neil`s post
I`d think it`d be a good idea to show a few scenario`s - ie flat market, 1% per year depreciation, 3% appreciation, actual appreciation of town in last 5 years.
indeed .. that is what we do also !!

5% / year is about historic average .. so if you hold 10+ years 50% should not be unusual .. but: you have to have cash and cash-flow to get there and that is not easy with many deals that are too pricey or too levered or the wrong asset class (i.e. new, expensive homes in big cities)

So show a 5 or 10 year view using slight decreases, flat or 20-50% upside !