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How Fast is the Payback Period?

Updated: Apr 1, 2021

It was both exciting and exhausting last two weeks as we launched the Recession Resistant Fund. We are blessed with more interest than we expected, and I would like to personally thank each of you that attended the webinar and especially who invested with us. For those of you who missed the opportunity due to the compressed timeline, we plan to have another tranche coming up, but the availability date and the tax benefit has yet to be determined. We had many conversations with investors, and the most common questions are:

  • How quick can I get my original investment back?

  • There are so many return metrics. Which one is the right one?

  • I understand that we get 100% bonus depreciation in year 1, which is very nice in current environment. But isn’t there a recapture when you sell in the end?

We plan to tackle these common questions one by one in the following weeks. Let’s start from the first one: How quickly can I get my original investment back?

The metric is called “payback period”. The smaller the number is, the quicker you get your money back.

Now imagine you have two investments, everything is equal, except for the cash flow distributions.

  • Investment 1: no cash flow before the final sale, and return 100% of investment (assume it’s $60,000) at the end of year 5.

  • Investment 2: every month distributes $1,000, until the end of year 5. Total distribution is also $60,000.

So what’s the payback periods for the two investments? It’s easy to see the payback period of investment 1 is 5 years. What about investment 2? Is it also 5 years, since you get your last $1000 back at the end of year 5? Nope. For investment 2, the whole principle is divided into 60 units: the first $1,000 is returned to you in one month, the second $1,000 is returned to you in two months, …. And the 60th $1,000 is returned to you in 60 months. So what’s the average payback period of investment 2?

Average payback period of investment 2

= ($1,000*1+$1,000*2+$1,000*3+…+$1,000*60)/$60,000

= 2.5 years!

That’s half of the pay back period of investment 1. Is it different from your initial thought? But makes sense after second thought? Most of the multifamily deals are like investment 1: you only get your original investment back at the end of the investment horizon (assuming no risk of losing capital, which is not always true). Now if you go back to look at the cash flow distribution of our deal, you will see it’s like investment 2: you can get your investment back much faster than the typical multifamily deals.

Invest with Confidence

Yan Yan

Sharpe Investor Group

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