Debt on negative cash flow property...

We are a IRR focused firm and we have a large hotel portfolio with debt on it. Right now the cash flow at the property is negative. Does it make sense to pay off the debt to juice return and re lever it when cash flow is positive? 

2 Comments
 

No, the cost of capital of equity > cost of capital of debt, assuming you can deploy and get that equity invested in other deals. 

Say your IRR for your other deals on your equity is 15%, your cost of debt is most likely way lower then 15%. So your firm should invest the equity in other deals to get 15% return, and continue paying the hotel debt as is. 

If your firm has a bunch of equity lying around not being invested and not making any money, sure pay off that debt.

PropMetrica | Multifamily underwriting template
 

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