Pre-Tax vs Post-Tax Leveraged & Unleveraged Returns

Donald J. ManciniPrincipal
July 2019

I want to talk to you about the difference between a leveraged and unleveraged return on your investment. Leveraged and unleveraged has to do with whether or not you have a mortgage on your property.

Unleveraged Rate Of Returns

An unleveraged return is where you have no mortgage. It is a very simple calculation to determine your unleveraged rate of return. We take your net operating income at the property, we divide that by what you paid for the property and we calculate what your unleveraged rate of return is.

Leverated Rate Of Returns

Your leveraged rate of return is where we add one more variable. We take your net operating income. We subtract your debt service, also known as your mortgage payment, and we arrive at an income after debt service. We divide that by the amount of equity that you have in the property and we have your leveraged return on investment.

Pre-Tax Returns

We want to know two more things. First what is your pre-tax unleveraged return and what is your pre-tax leveraged return. In order to calculate your pre-tax leveraged rate of return, we would take your net operating income subtract your debt service and that is your pre-tax rate of return.

Post-Tax Returns

Your post-tax rate of return is a completely different calculation. There we’re taking your net income we’re subtracting depreciation which is a deduction that you get if you own commercial property. We’re subtracting the interest portion of your mortgage payment which is another deduction that you get if you own commercial property. And then we arrive at your taxable income. From there we look at what your current tax rate is, given your financial situation, and we can calculate out that tax liability. We subtract that from your net income to arrive at your post-tax net income which then we divide by your equity in the property and we have your post-tax ROI, which is the most important calculation you can do in investment real estate.

With an unleveraged that becomes much more simple. You have your net income you have your depreciation. You have no interest deduction. We do the same calculation to arrive at your unleveraged post-tax ROI.

If you’re not doing this calculation you are 100 percent missing the mark on understanding exactly how your property is performing, number one. And number two, you’re missing the mark on how you can better figure out how to get a better post-tax ROI on your investment property which is your number one responsibility.

If you’re not doing this or you want to know how to do this at a higher more sophisticated level, please give me a call at the number below or drop me an email. I would love to talk to you about your property and I would love to show you the power of this particular tool.

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Should you have any questions about this article – or any commercial real estate matter – please feel free to contact me at [email protected] or call me at 508-635-6786.