“What do you want it to be?”

I have been around real estate long enough to know that the process of underwriting a property is about 99 parts art to one part science. In fact, the title refers to the old joke about what to say if someone asks you what the cap rate is on a deal. In any event, in the process of looking at something at work, I came across a situation where total return was going down as the hold period got longer. And there are really only a handful of explanations for why it should happen:

-Expenses are growing at a faster rate than revenues (i.e., shrinking margins)

-Debt is floating rate

-Debt transitions from interest only at the beginning of the hold period to amortizing later on

-There is capex as the hold period gets longer in the tooth that causes the denominator to increase

That’s it. No real reason for the post other than to memorialize a thought process.