Question

Bob buys a property that costs $1,000,000. The property is projected to generate NOI as follows: Year NOI 1 $100,000 2 $105,000 3 $110,000 Bob will own the property for two years. Bob will sell the property at the end of year 2 at a cap rate that is 250 basis points lower than the cap rate at which he bought the property. Assume Bob finances his purchase with a 50% LTV Fixed Rate IO loan at an annual rate of 5% with annual compounding and annual payments. What is Bob’s annualized IRR for the investment in question?

A. 83.54% B. 52.38% C. 78.93% D. 79.71%

Answer 1

Cap Rate at the time of property purchase = Rent/Cost = 100000/1000000 = 10%

Cap Rate at sale of property = 10% - 2.5% = 7.5%

Sale Value = 110000/7.5% = $ 1,466,667

Value of Loan Taken = 50% of Cost - $ 500,000

Personal Investment = $ 500,000

	0	1	2
Personal Investment	-      500,000	-	-
Rental Income	-	100,000	105,000
Sale Proceeds	-	-	1,466,667
Interest Paid	-	-         25,000	-            25,000
Net Cashflow	-      500,000	75,000	1,546,667

Teh above table gives the statement of cash flows per year. Interest is calculated at 5% of 500,000.

IRR = 83.54%