Can anyone please explain to me why in the example of Steve’s country pub, you would pass up a CoCR of 20.48% to do the second mortgage option to ‘apparently’ get a CoCR of 34.45%? I can understand the use of this option if you have limited funds. But at the end of the day when you have to pay back the 2nd mortgage (ie after 5 years), you would have been better off with the original option that has made you just over $2000 (after initial cash down) whereas the 2nd mortgage still leaves you almost $23,000 in the hole. It seems to me that total reliance on the CoCR in this case could be a bit misleading… am I missing something?
Cheers
DaveHi Dave,
The benefit of a high CoCR is leverage, and in many ways CoCR is just another way of saying “Bang for your buck”.
Assuming you have limited funds at any one time to ‘play’ with, CoCR gives you a yardstick which you can use to compare deals and find out which deal gives you the highest comparitive return on cash invested.
In this case, it’s what you do with the money which you DIDN’T invest which makes the deal a good deal or not.
For example, if you invested that money into another deal which returned you an amount higher than the cost of the second mortgage, then there’s merit in taking the second mortgage.But if the money you don’t put in the deal as a result of the second mortgage goes towards a doodad like a deposit on a BMW or (say) buying me a Fijian holiday *wink*, then financially you probably would have been better off without the second mortgage.
I hope this helps you out.
Brent
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