IRR Past 10 Years
Work for a family office and we have owned one of our buildings for 25 years now. We are now contemplating selling. Is there any use in doing an IRR across a 25 year hold period?
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Like... in general? Are you trying to figure out something?
The use would be figuring out your return rate.
What are you trying to solve for? Refi + hold vs. a sale? I'd imagine after 25 years your deal IRR isn't going to be overly sensitive to your sale assumptions, assuming you've recovered your initial investment.
I'd be thinking whether a refinance is possible and how much equity you can cash-out, and whether holding would yield a large enough equity multiple difference (vs. selling outright) to justify the headache of operating/maintaining the building and tenancy.
That’s correct. It’s a hold/sell exercise. I guess that’s right. Not much use in calculating IRR.
The IRR that is useful is what the IRR the property will return if you hold it going forward.
Doing an IRR on what the building returned is only useful for curiosities sake. The useful exercise would be to mark the building to market (at whatever net sales price you're going to get) and see if that's a deal that meets your current investment criteria/compares to other deals you're evaluating. If it's worse, sell, if it's similar/better, hold.
I get why someone might want to see their 25 year IRR to see the compounded return but it is kind of moot. I would rather look at NOI/Book Value or sale price relative to book value to see the asset gain/loss and if it makes sense to continue to hold or sell. If the asset generates a solid cash flow, then hold.
As others have said, I wouldn't be too focused on the IRR. What's your annual cash yield and do you have better opportunities to deploy that money elsewhere? Is the property becoming an operational pain? Do you have debt coming due? Do you like the longer-term prospects of the property?
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