Hi all - trying to prepare for an interview and having trouble answering/confirming the below questions. Input and deep logic would be appreciated.
1) 14% IRR over 3 years or a 38% IRR over one year. Which one do you choose and why?
2) assume you buy a buying for a 10 cap and sell it for a 10 cap the next year with no rent growth. What's your IRR?
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The first question is open to interpretation. The 14% IRR for 3 years yields close to a 1.5x multiple, which is higher than the 38% for one year. Now an investor may look at it in two ways, the outright return on the 14% IRR are better and more attractive, although with the second you have the opportunity to make a 38% return in one year and reinvest the proceeds into another deal which may give you higher returns over the same three year period. If this is an interview question it will come down to your understanding and explanation of how investors will look at this rather than there being a right or wrong answer.
Secondly, if you are getting 10% NOI in one year with no increase in cap val, you are only making a 10% IRR.
Thank you. IF possible, could you please exaplain the second point more?
E.g. if CAP stays the same and NOI does, doesn't the property sell for the same value and therefore 0% return?
No, because you’re still receiving income in the year. So when you sell the building for the same value you bought it for you essentially break even, but you have still generated 10% during the year through NOI
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