Question

This question shows how leverage influences IRR and that high leverage may incentivize default. 1. You pay $1000 for a property with 9% cap rate, keep it for 5 years, and sell at the end of year 5 at the same cap rate. The selling costs are 5% of the price. What is your IRR? Enter your answer in percent, but without percent sign. 8.15% 2. You are doing the same as above but instead of paying cash, you take a 70% LTV IO loan at 5% annual rate. What is your IRR? （10.95%） 3. In addition to the loan above you take a mezzanine IO loan of $200 at 8% annual rate. What is your IRR? 12.87 The neighborhood is declining, so your selling cap rate is 11% in questions 10-13. You have limited liability: you can walk away anytime. If you walk away in year t, you also lose the net income in that year so that your cash flow for year t is zero. 4. You pay cash as in Question 1 above. What is your IRR? 4.97% 5. You take the loan as in Question 2 above. What is your IRR? 4.86% You take an additional mezzanine loan as in Question 3 above. What is your IRR? need answer for question 6

Answer 1

You have specified you need answer for question 6. hence I am solving only that.

At purchase, consideration = $ 1,000; Cap rate = 9%

Hence, NOI = 9% x 1,000 = 90

At the end of year 5, Cap rate = 11%

Hence, Sale Value = NOI / Cap rate = 90 / 11% = $ 818.18

Please see the snapshot from my model below. Final answer is in cell colored in yellow. Adjacent cell colored in blue shows the formula in excel used to get the desired output.