Equivalent Yield (on entry and exit) in Excel Financial Models

Based on the most helpful WSO content, here's how you can calculate the equivalent yield on entry and exit in your Excel financial models:

Equivalent Yield Calculation

Equivalent Yield is a measure used in real estate to reflect the internal rate of return (IRR) of a property investment, considering both the income and the capital growth. It is often used to compare the attractiveness of different investments.

Steps to Calculate Equivalent Yield:

1. Determine the Net Operating Income (NOI):

   • Entry NOI: Calculate the annual net operating income at the time of acquisition.
   • Exit NOI: Calculate the projected annual net operating income at the time of sale.

2. Calculate the Purchase Price and Sale Price:

   • Entry Price: The price paid for the property.
   • Exit Price: The projected sale price of the property.

3. Calculate the Holding Period:

   • The number of years the property is held.

4. Use the IRR Function in Excel:

   • The IRR function can be used to calculate the equivalent yield. The formula considers the cash flows over the holding period, including the initial investment (negative cash flow) and the annual NOIs (positive cash flows), and the final sale price (positive cash flow).

Example Formula:

Assume: - Entry Price: $10,000,000 - Entry NOI: $500,000 per year - Exit Price: $12,000,000 - Holding Period: 5 years

Excel Formula:

• The array inside the IRR function represents the cash flows:
  • Initial investment (negative): -$10,000,000
  • Annual NOIs (positive): $500,000 each year for 5 years
  • Final sale price (positive): $12,500,000 (including the last year's NOI)

Adding to Your Financial Model:

1. Create a Cash Flow Table:

   • List the initial investment, annual NOIs, and the final sale price in a column.

2. Apply the IRR Function:

   • Use the IRR function to calculate the equivalent yield based on the cash flow table.

3. Validate with Argus:

   • Compare the results from your Excel model with the equivalent yield provided by Argus to ensure accuracy.

By following these steps, you can effectively add the equivalent yield calculation to your financial model, providing a clear measure of the investment's return both on entry and exit.

Sources: "Leaving IB Soon, Final Rants" - The Follow-Up, Exit opps: I've crunched the previous work experience of 390 PE Associates.., Two Bonds w/ Different Maturities but Same Price / Face. Which has higher yield?, Rx Analysts (Current / Former) How Did You Think About Exits?, Underwriting a realistic exit for Value Add Multifamily in "Core" Markets