Levered vs unlevered IRRs
I’m working on a case study and have been asked to show both levered and unlevered IRRs. But my levered IRR is lower than my levered IRR. Can you guys think of any ways to check mistakes that might lead to this?
Cost of debt (I/O) or mortgage constant (amortizing) can’t be higher than your cap rate
This. It's not necessarily a mistake, just given pricing is still adjusting to the rate hikes you'd pretty much have to buy multifamily/industrial with negative leverage right now as they're still trading at cap rates below where lenders are willing to price debt.
Exactly. Most stabilized urban multi family markets have adjusted asking caps nowhere near the increase of interest rates. With current market fear and the perspective of continued rental growth, these assets are still very attractive to sideline cash.
That makes sense. Any ideas if I know the cap rate is above the cost of debt?
It's really about whether the unlevered IRR is higher or lower than the cost of debt. If you are pricing in cap rate widening or a lot of leakage from GRI to NOI you might encounter this issue.
Also, where you are showing taxes in the model? Some people like to show pre-tax unlevered and post-tax levered, which could also cause this issue.
Are errors in a modelling exam ok? If so how much is acceptable? Do REPE funds want to see a 100% correct case?
It's not the end of the world, but as an interviewer I'd rather see that your numbers are accurate but you sacrificed formatting or some flexibility.
Depends on the error. Did you make a few minor errors because you don’t know the sector / market nuances, but overall built a functioning model where this can easily be fixed? No problem. Are there errors in it because you were careless / didn’t properly check your work? That’s a bigger issue, shows poor attention to detail and depending on the amount of time you had to complete it laziness.
My errors were in the revenue formulas. Instead of ^ I used * (absolutely stupid, but it can happen..) Anyway I passed the modelling exam and I am off for the final interview. Wish me luck :)
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