LearnCRE.com - Real Estate 101 - Real Estate Metrics
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Real Estate Metrics
LearnCRE.comReal Estate Finance 101
LearnCRE.com
Real Estate Metrics
+ Why?
+ Examples
– YOC – Yield on Cost = Stabilized Rent / TPC
– ROC – Return on Cost = (End Value-TPC) / TPC
– IRR – Internal Rate of Return
– Dev IRR – IRR over the development period (end value at dev end)
– 10 Year IRR – IRR over 10 year period (or 5 or 7) (end value at period end)
– EM - Equity Multiple = Equity In / Equity Out (ratio)
– GRM – Gross Rent Multiplier = PP or TPC / Rent (similar to P/E ratio)
– Cash on Cash Return = (Equity In - Equity Out) / Equity Out (%)
– Cash Yield / Cash on Cash Yield = NOI-Debt Service / Equity Outlay
– DSCR NOI / Debt Payment
– Debt Yield NOI / Loan Amount
– LTV Loan to Value = Loan / Value
– Passing Yield Contracted first year NOI / Property Value
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Real Estate Metrics
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At Acquisition Cash Flow (pa) Cost/Value Comment
Total 7.0 100.0
Debt 3.0 60.0 5% interest rate, 5 year term, I/O
Equity 4.0 40.0
At Disposition Cash Flow (pa) Cost/Value Comment
Total 8.1 115.9 At same yield, 3% rent growth
Debt 3.0 60.0 Pay off loan with proceeds
Equity 5.1 55.9
1 2 3 4 5 6
Acq -100.0
Rent 7.0 7.2 7.4 7.6 7.9 8.11
Disp 115.9
Total -93.0 7.2 7.4 7.6 123.8
Loan 60.0 -60.0
DS -3.0 -3.0 -3.0 -3.0 -3.0
Equity -36.0 4.2 4.4 4.6 60.8
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Real Estate Metrics
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Unlevered Returns Value Math Definition
YOC 7.0% =7.0/100.0 Yield on Cost
GRM 14.3 =100.0/7.0 Gross Rent Multiplier
ROC 15.9% =(115.9-100.0)/100.0 Return On Cost
IRR 13% =IRR(cashflows) Internal Rate of Return
Levered Returns Value Math Definition
EM 1.40 =55.9/40.0 Equity Multiple
Cash on Cash Return 40% =(55.9-40.0)/40.0
Cash on Cash Yield 10% =4.0/40.0
Levered IRR 22% =IRR(cashflows post debt)
Bank Returns Value Math Definition
DSCR 2.3 =7.0/3.0 Debt Service Coverage Ratio
Debt Yield 12% =7.0/60
LTV 60% =60/100 Loan To Value
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YOC – Yield on Cost
+ Market Rent / Total Project Costs
+ What does it mean?
+ Why important?
+ Stabilized Rent over
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ROC – Return on Cost
+ ROC = Profit / Total Project Cost
+ Profit = End Value – Total Project Cost
+ What does it mean?
+ Why important?
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10 Year IRR vs Dev. IRR
+ Internal Rate of Return
– The discount rate that sets estimated discounted cash flows equal to the initial investment
+ Revisit Business plans
– It is easy to figure out B1 returns by hand…how about B3?
– IRR helps here…
+ 10 Year IRR
– Total IRR over 10 year period
– Cash out phase
– Cash in phase
– End Value Phase
+ Development IRR
– IRR from start to Development End
– Cash out Phase
– End Value Phase
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Tell me What is wrong with this OM?
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Cap Rate
+ Capitalization rate
+ Market Rent / End Value or = Stabilized Rent / Purchase Price
+ “Yield forever” or “IRR as time approaches infinity”
+ Risk free rate plus real estate risk
+ How does this differ from passing yield?
+ Risks:
– Different property types
– Different locales
– Different property quality
– Different tenant profile
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