Of course. Does it generally? No.

The typical expectation for the IRR as the projection timeline is lengthened (say from a 3-year hold to a 7-year hold) is for the IRR to decrease.

However, we need to remember that the IRR is simply the result of math, so if the factors that are reflected in the math cause the IRR to go up instead of go down, it’s still a correct result even though it might not feel that way.

The primary reason that the IRR would rise when the timeline is lengthened is if the exit cap rate is significantly compressed (lower) than the going-in cap rate.

As shown in the embedded spreadsheet example above, if we assume that in the 7-year timeline the next buyer pays a lower going-in cap rate than the original buyer did (6.67% vs. 8.82%), the resultant IRR will be 18.4% vs. the 17.6% IRR for the 3-year hold. (Note: you can download the file by clicking on the Excel icon in the bottom border of the embed window)

A couple things to recognize here — the IRR is impacted by the interim year cash flows, not just by the final residual net sale cash flow, so the 18.4% is achieved in part by these additional operating year cash flows.

The third example in the Excel  shows the IRR decreasing, based on the exit cap rate being the same as the going-in yield.

This raises an important issue — which is, how do we select our future exit cap rate? See here for a great discussion.

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Included in the interview are Bruce’s

Best ever real estate book: Real Estate Finance and Investments: Risks and Opportunities by Peter Linneman, Ph D

Best personal growth experience and what you learned from it: Starting my own business and going through my first few years; every business needs customers… you have to be good at communicating your offering and satisfying your customers and getting them to come back

Best ever success habit your practice: Getting in early to get a couple of hours of work done before emails starting raining down on my head

Best ever deal that you have come across: … Listen to the full interview here

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Learn more about REFM Certification In Excel For Real Estate here; a great way to learn/sharpen your skills and add to your resume. Join the hundreds who have already done so!

Excel for Real Estate

Jason Eng Ken Yap, With Distinction – 11/15/2014
Hoang Chien Cong – 11/24/2014
Thomas Eddleston – 11/24/2014
Ian Bradley, With Distinction - 11/25/2014
Megan Nancy Sessel, With Distinction – 11/25/2014
Jason Archer, With Distinction – 11/29/2014
Benjamin Hale – 11/30/2014
Katherine Moore Hokanson, With Distinction – 11/30/2014
Stuart Carr, With Distinction – 12/1/2014
Christopher Bruner, With Distinction – 12/2/2014
Jonathan Vollinger – 12/2/2014
Michael Begg – 12/2/2014
Reagan Montgomery – 12/2/2014
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Seokyoung Hong, With Distinction – 12/4/2014
Katherine Moore Hokanson, With Distinction – 12/5/2014
Michael Begg, With Distinction – 12/5/2014
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Luc Dreifuss – 12/23/2014
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Stefan Steele – 1/3/2015
John Scott – 1/4/2015

 

Real Estate Finance

Christopher A. Aiello, With Distinction – 11/24/2014
Thomas Eddleston – 11/25/2014
Katherine Moore Hokanson – 12/1/2014
Stuart Carr – 12/1/2014
Jason Archer, With Distinction – 12/6/2014
Christopher Bruner – 12/8/2014
Seokyoung Hong, With Distinction – 12/17/2014
Gabrielle COUZIN – 12/19/2014
Alexander Schapira, With Distinction – 12/20/2014
Trevor Strickland, With Distinction – 12/22/2014
Clarence E. Wong, With Distinction – 12/24/2014
Panpan Rao, With Distinction – 12/27/2014
Sureshkumar G Nair, With Distinction – 12/27/2014
WEI HSUAN HUANG, With Distinction – 12/27/2014
Yifan Yang, With Distinction – 12/27/2014
William D’Avella, With Distinction – 12/29/2014
Leon, With Distinction – 1/2/2015
Masayo Allen, With Distinction – 1/2/2015
Matthew Dalton, With Distinction – 1/3/2015
Jonathan Vollinger, With Distinction – 1/4/2015

 

Joint Venture Waterfall Modeling

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Katherine Moore Hokanson, With Distinction – 12/8/2014
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Yifan Yang, With Distinction – 12/27/2014
Gabrielle COUZIN – 12/31/2014

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