CRE Modeling - NPV Rate
I am new to CRE modeling and I am building a model on a property acquisition and resale for a uni assignment. I found a pretty nice model on wallstreetprep course library that comes to IRR.
I am wondering which discount rate should I use for the NPV? (As it is required in the assignment instruction, but no CRE model I found calculates it): should it be a WACC (and in this case, how do we calculate cost of equity?) or the cap rate?
Any hint would be much appreciated.
hi
Choose minimum required return on investment for NPV. Use excel function to find actual NPV. Generally, I'll start at around 8% and adjust if needed. Cap rate is simply NOI/Purchase Price. Your cost of equity would be the same as your "minimum required return".
Should be cost of equity since you are discounting after interest cash flows (I think). In practice many people will throw in ~10% and have a large terminal value in their model, but really the actual market clearing cost of equity is probably significantly lower: https://www.aqr.com/research-archive/research/white-papers/demystifying…
10% for their NPV?? In that case, is their exit cap through the roof?
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