Before Tax vs. After Tax Analysis
In practice, is it generally more common to calculate your cash flows to equity and investment metrics (IRR, cash-on-cash, EM, etc.) on a pre-tax or post-tax basis? Or both?
In some of my classes, we're taught to do everything on a post-tax basis (mostly the "academic" professors), and in other classes, we don't take into account income or capital gains taxes (mostly the "industry" professors).
When I interned at a multifamily development shop, everything was done pre-tax.
My hunch is that post-tax analysis is used more so for personal investments in CRE, and for accounting/tax purposes; pre-tax analysis is used for your typical acquisitions/investment committee/BOE.
Basically, if you're modeling a deal for "someone else"--a group of people generally--you model it on a pre-tax basis since everyone has their own tax rates and tax consequences. If you're modeling a deal for "yourself"--you personally or the company that employs you--then you model it post-tax. Generally. There are exceptions, of course--my boss likes to look at deals pre-tax because it gives him a better idea of the merits of the deal.
^ Great answer
In practice, return metrics are modeled pre-tax. The reason being is that everyone's personal tax structure is unique. If you are dealing with a fund of pooled investors, having an educated post-tax analysis tailored to each investor would literally take months.
Take it one step further a lot of investors like to start with the unlevered pre tax return.
Dolorum et pariatur facere quaerat iste. Quisquam atque enim ex assumenda nobis. Velit in delectus aut incidunt rerum incidunt amet in. Quia nulla et est velit dicta saepe. Ducimus sit velit alias est rerum repellat.
Quam autem rerum nisi. Molestias laborum exercitationem voluptates dolorem dicta. Quo qui vitae perferendis molestiae. Quia ullam tenetur ea sit mollitia dolore consequatur.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...