A S X
ASX PROPERTIES l 1921 Kaliste Saloom Road, Ste. 203 l Lafayette, LA 70508 l Office: (337) 534-8165 l Email: firstname.lastname@example.org
P R O P E R T I E S
ASX Properties' strategy is extremely simple. We know that if we can obtain an initial cash on cash return of 10%, then our overall return should be in the 25-30% range. This is because the overall return from real estate ownership is actually a total of four returns: cash on cash return (usually 10% annual return in a typical case); pay down of debt (85% return over 10 years); tax savings from depreciation (12% annually); and appreciation (80% over 10 years assuming a very conservative appreciation rate of 1.5%/year); for a total simple ANNUAL return of 38.5% over ten years in a typical case. The cash on cash returns and tax savings from depreciation are returned to investors annually; the debt pay down and appreciation returns are only able to be returned to investors upon a sale or refinancing.
EXAMPLE: ASX Properties is currently considering purchasing a 200 unit class B- apartment complex in a rapidly gentrifying area of Atlanta for $10,000,000. The property currently produces an NOI of $650,000 so the purchase price represents a cap rate (earnings/asset price) of 6.5. Current non-recourse loans can be obtained at 80% loan to value amortized over 30 years at 4.5% fixed interest for 10 years. The mortgage constant for this loan is 6.08 (total principal and interest payments of $40,535.0/month or $486,420/year divided by principal loan amount of $8,000,000 = .0608).
So the property would produce an annual cash flow of $650,000 - $486,420 = $163,580. The equity needed to buy this property is $2,000,000 ($10,000,000 purchase price minus $8,000,000 loan amount) so the cash on cash return is only $163,580/$2,000,000 or 8.18%. Through improved management techniques alone (better tenant screening and selection, improved trash pickup and landscaping, raising rents to market, etc), ASX is confident it can increase NOI 20% or from $650,000 to $780,000. Cash flow is now increased to $780,000 NOI-$486,420 debt service = $293,580 or a 14.7% ANNUAL return on the original $2,000,000 investment.
The remaining debt on the original $800,000 loan after ten years is $629,837 (this can be obtained from any mortgage calculator or amortization table) so the amount of debt pay down is $170,163 or 85% of the original $2,000,000 investment.
Tax savings will of course depend on the individual investor's tax bracket but assuming a 40% bracket (most investors with state income taxes will actually be in higher tax brackets), annual tax savings will generate a 12% return of the investor's investment. This is because through normal cost segregation we can depreciate an average of about 6% of the acquisition cost over the first ten years. This means a $600,000 "paper loss" due to depreciating 6% of our $10,000,000 property. For an investor in a 40% tax bracket, this means a savings of $600,000/$2,000,000 investment times 40% = 12% or $240,000 in (tax free!!!) tax savings on the $2,000,000 investment ANNUALLY.
Finally, assuming a very conservative appreciation rate of 1.5%/year, the building will be worth $11,600,000 after 10 years. This represents a $1,160,000 gain on the initial $2,000,000 investment, or 80% over 10 years. (In fact the building should appreciate 20% in the first year alone if the NOI is increased by 20%).
Adding all four return components together we get a simple annual return of 14.7% from cash flow, 8.5% from debt pay down, 12% from tax savings, and 8% from property appreciation for a simple annual return of 43.2%. Please note that the returns from cash flow and tax savings are achieved annually, whereas the returns from debt pay down and appreciation are only achieved when the property is sold or refinanced. This case example assumes a 10 year hold; however, increased IRRs can be obtained with shorter hold periods.
Disclaimer: Future investment performance can vary from past performance, and you should not base your decision to invest in ASX Properties on past performance. Past earning rates are not an indicator of future earning rates. The investment returns of ASX Properties are not guaranteed, and the value of the investment may rise or fall.