Current Rate of Return article
How is the Current Rate of Return calculated for commercial real estate investments and developments? What are the factors that the Current Rate of Return takes into consideration when shown in a proforma income statement, and what is ignored? Why is the Current Rate of Return useful for investment real estate? These are the questions that are explored using the Proforma Example in this article.
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Video Title: Learn about the Current Rate of Return
Video Publication_Date: Friday, June 21, 2024
Video Duration: 4:02
Video Description:
The topic for this commercial real estate investment analysis video is Current Rate of Return. Throughout the video planEASe Software is used to illustrate Current Rate of Return. The video does not use the current Proforma Example, but all the factors that the Current Rate of Return are sensitive to are covered.
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| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 |
| Total Gross Income | $365,472 | $372,443 | $370,410 | $376,040 | $384,217 | $414,321 |
| Less: Vacancy & Credit Loss | 19,084 | 3,202 | 14,620 | 5,049 | 3,501 | 50,321 |
| Effective Income | $346,387 | $369,241 | $355,790 | $370,992 | $380,717 | $364,000 |
| Total Operating Expenses | $69,400 | $71,244 | $73,141 | $75,094 | $77,103 | $79,170 |
| Net Operating Income | $276,987 | $297,997 | $282,649 | $295,898 | $303,614 | $284,830 |
| Total Debt Service | $230,823 | $230,823 | $230,823 | $230,823 | $230,823 | $230,823 |
| Net Operating Cash Flow | $46,164 | $67,174 | $51,826 | $65,075 | $72,791 | $54,007 |
| Sale Proceeds Before Tax | 931,617 | 1,226,005 | 1,392,862 | 1,360,161 | 1,516,729 | 1,370,778 |
| Current RoR Before Tax | | 19.09% | 1.37% | 16.30% | | |
In this case the 2012 Current Rate of Return was calculated by: | 2012's increase in Sale Proceeds Before Tax | 1,360,161 - 1,392,862 |
| + 2012 Net Operating Cash Flow | $51,826 |
| divided by beginning 2012 Sale Proceeds Before Tax | 1,392,862 |
| equals the 2012 Current Rate of Return | 1.37% |
Considers: -
Scheduled Income (Current Year Only), Debt Payment (Current Year Only), Vacancies (Current Year Only), Expenses (Current Year Only), Sale Proceeds Increase (Current Year Only)
Ignores:Why is Current Rate of Return useful?
Current Rate of Return is not commonly used in commercial real estate analysis. It is a
Return on Investment (ROI) type ratio where the cash flow is divided by an investment. Here the investment is assumed be the amount of proceeds you could have received if you sold the property in the beginning of the year, and the cash flow part is the cash flow plus the increase in sale proceeds in the next year. So if this is a high percentage number, do you want to sell in the beginning of the year or after you have received the year's cash flow plus the increase in sale proceeds? If all the assumptions are true, you might want to wait until the current rate of return is a small percentage number.
What is the Current Rate of Return Sensitive to:
Scheduled Income
(Current Year Only), Debt Payment
(Current Year Only), Vacancies
(Current Year Only), Expenses
(Current Year Only), Sale Proceeds Increase
(Current Year Only)The Current Rate of Return is shown in these planEASe Reports:
Written by
Michael Feakins, CCIM
of planEASe Software