I have an interview this week with a CRE brokerage firm and an Analyst sent me an OM on a portfolio of assets. He told me we'll be talking about the portfolio/properties and wanted me to think about a few questions. The questions include risks, valuing the portfolio, valuing each asset individually, would I buy the asset, and the "year 1 leveraged return for the asset". I've broken down multiple risks and performed a dcf calc for the portfolio and each asset based on the broker's future cash flows. I have my NPV for the portfolio and each asset so it's simply a yes/no depending on purchase price. I'm not sure what he is asking for when he says "year 1 leveraged return for the asset". I've assumed a purchase price for the portfolio and created a loan based on a 65% LTV. Is it as simple as inserting the purchase price and annual debt service into the Year 1 cash flow? I will eventually reach out to the analyst and ask him, but I wanted to see what you guys thought.
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He's probably looking for cash-on-cash. [Cash flow to equity] / [equity basis]
calculate leveraged return by including the debt service payment in your hold years and inserting the cash paid (not the purchase price - the purchase price less the debt contribution).
@luv2speed So would this be correct for the return for Year 1?
Year 1: Cash Flow before Debt Service - Cash/Equity Paid - Annual Debt Service = Return for Year 1?
The analyst also told me he's not necessarily looking for the correct answers, but he wants to know that my thought process is correct. I appreciate the help.
The first year cash flow would not include the cash paid. That would be year zero or just separate. So you would divide the rest of the first year cash flow by the cash/equity paid to get the first year leveraged return.
Just a quick question here - so you're saying the Y1 CoC return includes the acquisition costs as well (in the numerator)? If so, would it make sense to say that, assuming no acquisition costs (or closing costs on my debt) that my Y1 Unlevered CoC should = my going in Cap Rate?
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