49 Comments
 

Thank you very much ! How this rule would apply for the following example:

-Purchase price/sale price: 100

-Cap rate: 5%

-LTV: 80% 

-Debt Cost: 5% per annum

No other costs

What would be the IRR after a 2 year holding period?

 

Thank you very much ! How this rule would apply for the following example:

-Purchase price/sale price: 100

-Cap rate: 5%

-LTV: 80% 

-Debt Cost: 5% per annum

No other costs

What would be the IRR after a 2 year holding period?

Interested in what kind of firm asked you this question?

As a side not have you ever tried modelling simple examples to try and understand how the maths works? I find that quite useful. Ie the coc here is 5% as debt is non accretive, so your irr will remain at 5% if there's no capital growth 

 

This is just a derivate of the rule of 72 - to 3x and to 4x takes 1.5 and 2 times longer than to 2x, respectively. Ergo, multiply 72 by 1.5 and 2.

To give you an example of how I personally approach it: if someone tells you a 3X was achieved in 5 years and asks you IRR. I know it doubled in ~3 years (5/1.5). 72/3 = 24% IRR. All rough math obviously but it's easy to remember and gets you close enough for a quick mental heuristic.

 
Funniest

Just build yourself a little table of 9 key numbers and use those as guard rails to get within 5% of whatever they throw at you

3yr  1.5x / 2x / 3x

5yr  1.5x / 2x / 3x

7yr 1.5x / 2x / 3x

Match IRRs up and should be able to navigate from there.  If they ever ask IRR on a 4x or 5x or something stupid just say "it don't matter baby we rollin' in carry at that point and beating off potential new LPs with a stick"

 
pudding

I’ve never been asked to calculate IRR in my head. That’s an absolutely ridiculous request and I doubt the interviewer can do it either…

Yup. If someone asked me to calculate an IRR in my head I'd be very confused about the interview and genuinely ask "why?" 

Seems like mental masturbation 

Commercial Real Estate Developer
 

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