Hi all,
I am in real estate investment management and have been working on a lot of acquisitions recently. I have been using Argus and double checking/sense checking with my excel financial model. One thing I have noticed that Argus does well is showing what the equivalent yield is on entry and what it is on exit. I have seen formulas and definitions on the equivalent yield but wondered if someone can tell me in simple terms how to I can add this to my financial model/ tell me a formula that works?
Thanks
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:
Determine the Net Operating Income (NOI):
Calculate the Purchase Price and Sale Price:
Calculate the Holding Period:
Use the IRR Function in Excel:
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:
=IRR({-10000000, 500000, 500000, 500000, 500000, 12500000})Adding to Your Financial Model:
Create a Cash Flow Table:
Apply the IRR Function:
Validate with Argus:
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
I would like to know the equivalent yield which is the weighted average between the NIY and the reversionary yield, not the IRR please
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