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  • Property Yields

    ROI on repayment mortgage decreasing?

    Good eveining all!

    Currently writing up a business plan and I’ve came accross something I hadn’t thought of before I started.

    I have a property with a repayment mortgage with permission to lease.

    Whilst running my numbers for “current portfolio” I noticed that my ROI is actually dropping year on year because I am paying down more of the mortgage with repayments.

    Have I got my ROI calculations correct?

    cash in / net yield = net ROI

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    Omega Property (Formerly SBS Ltd.)

    I am not professionally trained to give advice, generally posting for the benefit of the community or my own personal development.

    May be a bit late for you, but seems you are equating cost with cashflow.

    With repayment mortgages you need to separate it into 2 parts – the interest payable, and the capital you are paying off. As you are paying the capital off, it is not a cost as such, you are simply reallocating income into equity, so the net result is zero loss or gain on that element. It is a cashflow consideration, but not a cost one.

    It follows that from a cost perspective, you need to consider only the interest element for your ROI calculations. As you are paying of the loan with equity from the capital repayment, you owe less month by month, and therefore you pay less interest, and so your “costs” (as opposed to cashflow ) decrease, and your ROI actually increases month on month as your costs decrease. You could create a complex IRR model to see how your ROI increases month on month, but much easier and pretty accurate would be simply to model it year on year for say 10 years, taking the annual interest paid year on year.

    Good luck

    Max

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    Sorry, thought about it a bit more and have an embarrassing about face! You are injecting more equity month by month, so it is logical to add that to the initial equity invested on a monthly basis, and calculate ROI off that, having taken the monthly interest element as a cost - so yes, diminishing ROI!

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    ROI is decreasing but your assets are increasing.

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