New to commercial real estate. Am running this mock scenario, curious about a few things (Questions in comments).
[{"id": "e0m9175", "text": "Just vague questions starting from the top:\n\n- Equity Yield (IRR). What does this mean in layman terms?\n- On the Equity Investment Cash Flow &amp; 10 Year Yield Graph, why does year 10 suddenly jump to $218,838 from $24,289?\n- What does the final bar graph mean on \"Optimal Holding Period\"?\n\nThanks in advance!", "replies": [{"id": "e0nj7eu", "text": "Looks like you got your questions answered. I wanted to point out a couple more things. \n\nSome of these terms are interesting. \n\n- I\u2019ve never heard the IRR called the \u201cequity yield.\u201d That may be an alternative name for it but I\u2019ve never heard it before. I\u2019m in the US.\n\n- More generally, the IRR assumes you can reinvest the capital at the cash/cash rate of return. If you cannot, you should use a Modified IRR (MIRR) function which assumes a different reinvestment rate.\n\n- Also, as they say, \u201cyou can\u2019t eat IRR\u201d, i.e. making all your money on a sale in year 10 with very little cash flow in between acquisition and sale may not be a good strategy if your using the cash flow to pay your bills or fund your business. It\u2019s also much riskier, which is why I like cash on cash, as a return metric, better.\n\n- Finally, what the spreadsheet called the \u201cactual debt cost\u201d or something like that is the mortgage constant, and your breakpoint at which debt provides positive leverage/cost of the debt. I\u2019d read up on that, as it\u2019s important.\n\n", "replies": [{"id": "e0nti78", "text": "Just to note, I\u2019ve seen Equity yield usually referring to cash-on-cash and overall IRR referring to the unleveraged property return. I think it\u2019s just different naming conventions", "replies": [{"id": "e0nud2t", "text": "Agreed. I\u2019ve seen equity yield as cash/cash. It would make me super nervous to use a black box non-excel model that used the wrong name for a return metric", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "e0mc95n", "text": "1) IRR is a way of measuring the profitability of an investment. It is essentially a very basic way of telling how much your property will appreciate or depreciate over time. If your IRR is greater than some base rate (an alternative investment usually), you should invest, otherwise not. It can also be used to see if taking out debt is a good idea (see: leveraged/ unleveraged IRR) Your equity yield can change each year because your equity changes as you pay off the loan.\n\n2) Your cash flows up to year 10 include only cash flows from operations, but in year 10 cash flows are from both operations and from sale.\n\n3) Optimal holding period pretty much just tells you how long you can hold a property and still make money compared to an alternative investment. At a certain point, It is no longer optimal to hold an investment so you should consider selling it and reinvesting in something else that is more profitable.\n\nHope that helps!", "replies": [{"id": "e0mimuc", "text": "Helps a ton.  Thank you!", "replies": [], "depth": 2}, {"id": "e0n6xn2", "text": "+1-ing these answers. All helpful and correct.\n\nCurious how this image was put together though... I'm sure I could do it in excel, but the layout makes me think this is some piece of software I'm not familiar with.", "replies": [{"id": "e0n8pf7", "text": "Ive got a software at the office, i just photoshopped the 3 pages it spit out for this report", "replies": [], "depth": 3}], "depth": 2}, {"id": "e0nyjmj", "text": "&gt;At a certain point, It is no longer optimal to hold an investment so you should consider selling it\n\nWhy is this?  Doesn't that IRR just flatten out at some point and you continue to see returns?  The IRR won't be going down at some point, will it?", "replies": [{"id": "e0o1qw9", "text": "Correct, however what you have to consider is the marginal rate of return (MRR). Over time you will notice the MRR decreasing (IRR can still be increasing), but the rate for a reinvestment will remain constant or increase compared to your base year assuming constant inflation. Once your MRR is lower than the reinvestment rate, it is no longer optimal to hold your original investment! ", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "e0mjon2", "text": "Looking into acquiring larger properties soon.\nHow did you create this analysis? Is it a website, app, etc..?\n\nThanks", "replies": [{"id": "e0n8qi4", "text": "Its a website. The Analyst Pro", "replies": [{"id": "e0njyy1", "text": "Thank you! \ud83d\udc4d", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "e0n8f6q", "text": "Can someone explain to me what that sales proceeds line is intending to do?  I'm not sure what I'm looking at there and it seems to be pulling into the annual cash flow figure.  Maybe I'm missing something..", "replies": [{"id": "e0od2sy", "text": "That line's just telling you whether you're making or losing money on the sale... It's unclear as to why the entity would be buying for $720,000 what they expect to only be able to sell for $565,000 twelve months later.  \n  \nAnyone understand where the $736,000 is coming from on year one 'EOY Value using Going in Cap Rate'? I must be missing something because dividing Year 1 NOI of $49,724 by 6.91% is giving me $719,595", "replies": [], "depth": 2}], "depth": 1}, {"id": "e0nhrls", "text": "Unless it is lumped in with expenses, I don't see a line for capital.  You ate going to have to replace something over the course of 10 years.", "replies": [{"id": "e0ocrkm", "text": "That should be included in expenses as a replacement reserve, but its hard to see that being the case with a 19% OER", "replies": [], "depth": 2}], "depth": 1}]