If Fred and Frida have $1,500,000.00 in cash, and invest it in a $1,500,000.00 NNN property with an Annual Cap Rate of 8%, they will have an annual income on their investment of $120,000.00
$1,500,000.00 NNN Investment (All cash) with an annual cap rate of 8% = an annual income of $120,000.00
However, if Fred and Frida take the same $1,500,000.00 and borrow an additional $3,000,000.00 and invest all of the money in a $4,500,000.00 NNN property with an Annual Cap Rate of 8%, they end up with an Annual Income of $360,000.00. Out of these funds, they can make the $270,000.00 in loan payments and still have $90,000.00 in annual income.
8% Cash-on-Cash Return
$1,500,000.00 and Borrow $3,000,000.00
Buys $4,500,000.00 NNN at 8% Cap =
$270,000 Loan Payments
$ 90,000 Annual Income
Annual Income $90,000.00 + New Depreciation Schedule and equity accumulation on $4,500,000 (as opposed to $1,500,000)
PROJECTED APPRECIATION OVER FIVE YEAR TERM
What would happen to Fred and Frida in each different scenario? If they purchase the one with their original $1,500,000, or the second option for the $4,500,000 which the loan would give them, and then assume those properties would appreciate over 5 years at a rate of 3% per annum.