Unlevered/levered Equity multiple?
So equity multiple can either be levered or unlevered right?
so for this question
If you buy a property at a 6 cap, using 60% Leverage (5% Interest only), what is the year 1 cash on cash return?
3/40
Since cash on cash is a levered metric we gotta subtract NOI-interest payments. Would it ever just be 6/40? If the interviewer said a unlevered cash on cash..?
Continuation of previous question, this is pen and paper question - if you hold this building for 10 years and NOI grows by 3% each year (compounding), what is your unlevered equity multiple and IRR?
For this one, can it ever be unlevered equity multiple? Then would it be (133+70+ INterst payments)/40?
would interest payments be 60*(.05^10).....?
Im so confused with levered and unlevered someone pls help
Ah, the classic mix-up between levered and unlevered metrics in real estate investment analysis! Let's break this down in a way that even a monkey could understand it (no offense to my fellow primates).
Levered vs. Unlevered Basics
First off, unlevered metrics do not take into account any debt financing. They're all about the property's own operational performance. Levered metrics, on the other hand, factor in the effects of financing (debt).
Equity Multiple
Cash on Cash Return
Your example mentions a Year 1 cash on cash return of 3/40, derived from a $3 cash flow after debt service divided by $40 of equity, which equals a 7.5% return. This is indeed a levered metric because it considers debt service (interest payments).
If an interviewer asks for an unlevered cash on cash return, they're asking for a hypothetical scenario where the property is bought without any debt. In such a case, the cash on cash return would indeed be based on the property's NOI divided by the total purchase price (or total equity, since they're the same in an unlevered scenario). However, "unlevered cash on cash" is a bit of a misnomer since cash on cash typically refers to levered returns.
Unlevered Equity Multiple and IRR for a 10-Year Hold
When calculating the unlevered equity multiple for a 10-year hold, you're looking at the total returns generated by the property (NOI growth and sale proceeds) divided by the initial equity investment, without considering any debt.
Interest payments wouldn't factor into the unlevered equity multiple calculation since we're ignoring debt.
For the IRR (Internal Rate of Return), it's a measure of the annualized effective compounded return rate that can be earned on the invested capital, i.e., the rate at which each invested dollar is projected to grow for each period it is invested. For unlevered IRR, you're not considering debt, so it's purely based on the property's operational performance and eventual sale proceeds.
Conclusion
Yes, you can have both levered and unlevered equity multiples. The key difference is whether or not you're taking debt into account. For unlevered calculations, forget about the debt and focus solely on the property's income and expenses. Remember, when in doubt, break down the components of your calculations, and it'll start to make more sense. Keep practicing, and you'll get the hang of it!
Sources: Real Estate Private Equity Technical Qs, Levered vs. Unlevered Free Cash Flow Difference, Real Estate Interview Questions Master Thread, Real Estate Interview Questions Master Thread, Corp Dev LBO returns question: Levered and Unlevered IRR
Just break it down and chunk it out.
so for unlevered, pretend there is no debt. Unlevered would be NOI less Capex. That value that you sum to will be unlevered cash flow. Take that value and divide it by the purchase price plus closing costs. That’s your unlevered cash on cash.
To get levered, you subtract debt service from your yearly cash flow and divide it by your equity amount less debt amount.
calculating equity multiple; it’s similar. For unlevered take all the cash flows and sale price assuming debt. For levered, sum all the cash flow after debt and upon sale, pay back the debt.
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