Author Topic: what's your WACC?  (Read 1039 times)

Mr Mark

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what's your WACC?
« on: April 12, 2014, 12:42:57 PM »

When assessing an investment opportunity, you should discount the cashflow according to your opportunity cost for your equity capital. Otherwise you are in danger of thinking a deal is good, when in reality it's terrible.

I assume a long term nominal return of about 8% on my portfolio, so any money from the 'stash needs to repaid at 8%   just to keep even. Any leverage via mortgages would be a lower cost of capital, say 5%. Thus on average with a 30% equity ratio, I have a weighted average cost of capital of 6%.

Any real estate project needs to return this just to pay its way, and only extra cashflow above that counts as a real investment return. So when I look at the cashflow, I need to use a discount rate and include the capital investment upfront.

Chiron

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Re: what's your WACC?
« Reply #1 on: April 15, 2014, 01:53:27 PM »
Although this is definitely a good exercise it gets complicated in real estate because there are multiple aspects of the "return on investment":

1) Cash flow;
2) Equity build up through principal paydown and appreciation;
3) Tax benefits through income deferral and deductible losses; and
4) Other various benefits that come from owning a small business as opposed to just investing in the market.

So saying you're getting 5% cash on cash return is lower than your 6% WACC is only part of the picture.  You also need to account for the other benefits as well.