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Many investors use a quick rule of thumb that if the interest rate on a loan is higher than the cap rate on the asset, youre losing money. While these generalities exist for a reason and are useful as a quick opinion, the reality is more complicated. Cap Rate is most useful as a measure of future returns when a property is fully stabilized - meaning the Net Operating Income is unlikely to dramatically change over the course of the investment life.
Understanding your future investment returns without a solid pro forma model is nearly impossible. Today were looking deeper into a couple of common investment scenarios to test whether youll make a better IRR (Internal Rate aspire finance personal loan Return) by buying a property all-cash, or levering up at 50.
Stabilized Office. The first example maximum personal loan amount in india is a stabilized office building being acquired at a 6 cap rate for 10,000,000. Assuming its a safe, conservative investment and you expect to sell in 10 years for 12,000,000, should you buy cash or lever at 50. Youre looking at turning your 7 return into a 9 return for this investment with the given loan terms, which are reasonable ones in todays market.
Leverage wins here.