Equity buildup calculation

[JimDandy]

I am trying to duplicate the results found on a real estate website that
shows the equity buildup over a period of 20 years based on purchasing a
$200,000 property every two years which appreciates at 5% with a 10%
down payment. Every 2 years you would take an equity loan of $20,000
from the previous property to purchase the next. The calculation also
seems to take into account the amount of equity gained by paying down
the loan. The numbers that are used in the calculation are:

Code:
--------------------

200000 Initial value
5 % Rate of growth
7 % Annual interest rate
10 % Down payment
0 % Misc. expenses, ie closing, fixing, holding
20000 Total investment
2 Number of years between reinvestments
--------------------

The results of the calculation are:
Code:
--------------------

Results
Time years Net Equity

2 $44,289.09
4 $98,076.20
6 $217,185.30
8 $480,947.01
10 $1,065,035.38
12 $2,358,472.64
14 $5,222,730.91
16 $11,565,501.21
18 $25,611,278.93
20 $56,715,017.95
--------------------

I’m no expert at real estate formulas but I do think of myself as
pretty good at it and I’ve written a number of formulas and
calculations that prove out certain theoretical returns but this one
has me stumped. The website itself is
http://www.taxloopholes.com/PUBRealEstate.asp?Calculate=y#calc

 

[Vasant Nanavati]

This doesn't make sense on the face of it. If your property is appreciating
at 5% and you are paying 7% interest on 90% of its value, you are not going
to make any money or build up any equity.

 

[JimDandy]

Sure we will if we keep in mind that as an investment property the
calculation assumes that all mortgage costs are paid for by a renter,
so all interest paid is not deducted from the value but all principal
is added in.

For instance, the $200k home, appreciating at 5% we will have gained
$10,000 in value and the principal paid on the loan will have added in
roughly $2k the first year. But although the interest is about $11.5k
it is not subtracted from the equity of our holdings since it was not
paid by us.

 

[Vasant Nanavati]

Sure we will if we keep in mind that as an investment property the
calculation assumes that all mortgage costs are paid for by a renter,
so all interest paid is not deducted from the value but all principal
is added in.

OK, that was not stated anywhere in the OP. And then are we assuming a
30-year conventional mortgage?

In any event, in that case it's quite simple. Over 24 months, the principal
paydown is $3,789.09, the appreciation is $20,500.00, and the original
investment is $20,000.00 for a total equity at the end of 2 years of
$44,289.09. You just build from there.

 

[JimDandy]

Sure we will if we keep in mind that as an investment property th
calculation assumes that all mortgage costs are paid for by a renter
so all interest paid is not deducted from the value but all principa
is added in.

For instance, the $200k home, appreciating at 5% we will have gaine
$10,000 in value and the principal paid on the loan will have added i
roughly $2k the first year. But although the interest is about $11.5
it is not subtracted from the equity of our holdings since it was no
paid by us

 

[JimDandy]

The answer was so obvious that I could not see it. I appear to have been
calculating the reduction of principal but then not adding in the
appreciation.

I thank you for your kind response...