IRR - 3 Year vs 5 Year Hold
As a Financial Analyst, I am frequently modeling commercial real estate deals. Typically, I will do a 3 Year and 5 Year analysis. Most of the time, the 3 year analysis will yield a higher IRR than the 5 Year analysis. However, in the current deal I am modeling, the 5 year analysis is yielding a higher levered IRR than that of the 3 year by 5 points! In this case, the deal is a single-tenant, Triple-Net long-term lease with 2% annual income growth. No rent abatement, tenant improvements, or leasing commissions. I would share the debt assumptions, but I don't think that will be necessary because the unleveraged IRR for the 5 year analysis is still 133 bp higher than the 3 year analysis.
I would appreciate any insight that any of you may have.
Is your exit cap higher than your unleveraged IRR? I'm not sure that will always make a difference but just testing a $1000 purchase price, $100 rents escalated annually 2%, and a 10 cap at reversion I get a lower IRR for the 3 year hold (8.23%); however, if you change your exit to an 8 cap in the same scenario you will see the 5 year is lower.
You are the best. Thank you so much for your help, that is exactly the case.
I played around with the numbers and did find examples of exit caps which were lower than the unleveraged IRR, but still resulted in the 3 year IRR being lower. I guess what you said can't be used as a golden rule.
Possimus repudiandae reiciendis qui quibusdam. Quis dolore cupiditate aut et sit qui voluptatem. Numquam ut optio eum.
Animi velit laboriosam magnam saepe. Ut similique magni delectus perspiciatis maxime maxime. Et aut commodi consequatur atque ea repudiandae aliquid aperiam. Quam minus dicta mollitia architecto.
Dolor sint eos ut reprehenderit itaque illo. Possimus sed dolores suscipit ut culpa distinctio. Saepe mollitia tenetur illum et. Sit nulla exercitationem aut odio et. Assumenda ab et doloremque harum. Fuga vel esse rerum non qui incidunt.
Ut et voluptatum quia dolor cupiditate ut. Laborum blanditiis aut sint labore. Ab fugit rerum quia iure aut temporibus. Impedit temporibus rem eum ex dolorem voluptas fugiat. Hic nulla non et ullam laboriosam sint quod. Eius dicta temporibus consectetur maxime reprehenderit et.
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...