Explaining IRR (internal rate of return) to someone from non-finance background can be difficult. In the post on IRR, I explained the theory and calculation of IRR in much detail. However, many a time, when I talk to people from different disciplines I find it difficult to explain. Watch this video to know how, now, I explain IRR to almost anyone! Hope you will enjoy this video post, use the comment section below to let me know what do you think.
Almost a year back I wrote the post about real estate analyst interview; it mostly covered the questions being asked. Many readers asked to provide the answer, but my job kept me busy and I was not able to write this post earlier. Thanks to Alexander Curry of Tarantino Properties, Inc, who wrote me an email providing in-depth feedback to the questions listed in that post. Because of Alex I decided to write this post. In this post I’m going to answer the 10 most commonly asked questions in a real estate analyst interview. If a project has zero NPV
The short answer is, yes, it does make financial sense to invest in a property for AirBnB listing Income, and the long answer will follow in this post. Be advised that this post is not about how to maximize profit or optimize your AirBnB listing. There are many authors who blog about this, and I would recommend Jasper Ribbers’ blog and book for this. In this post we will explore if does it make financial sense to invest in a property for AirBnB listing Income, and how to analyze it. As you know, AirBnB is an online marketplace for vacation
The post about Project IRR and Equity IRR became one of the most commented posts on this blog. Apart from the comments, I still receive tons of email asking me what the other circumstances are when the equity IRR will be lower than project IRR. In that post we considered a simple project with one year gestation period and concluded that the equity IRR will be lower than the project IRR whenever the cost of debt exceeds the project IRR. We noted that it is the cost of debt and not the weighted average cost of capital, which impacts the
I have a funny story to tell – once I was explaining the result of a project feasibility analysis to our development team and one guy asked me to explain the calculation of net present value. So, I started explaining him in the simplest way possible. He was curious, so I was happy. Then suddenly he interrupted me and asked, But why are we giving discounts? Nonetheless, even we professionals make mistakes. In one of the previous posts about the equity NPV, I discounted the equity cash flow at the weighted average cost of capital (WACC). Our reader, Srihari pointed
Use of debt financing is a standard practice in the real estate investing; and is often referred to as leveraging. Debt financing is used by the equity holders to enhance the equity return; however, debt financing can also magnify the severity of capital loss if the property value declines. Let’s look a case study to explore this further; we shall use simpler set of assumptions for the sake of ease. Consider a property with an acquisition cost of $10,000,000. Property is assumed to yield $700,000 in annual rent throughout the holding duration (no escalation!). Assume the property is sold at
The frenzy is back in the Middle East realty market. The average property prices in Dubai went up almost 18% in the third quarter this year, compared to Q3 2012 (link). The average price of a mid-range villa has soared 34% this year to 1,275 dirhams a square foot, the highest since October 2008 when property prices began to fall. Authorities are taking proper steps to avoid new property bubble forming. Dubai, which suffered one of the world’s worst property crashes in 2008, has doubled the property-sale fees in a bid to limit speculation and avert another housing bubble (link).
Effective Rent is defined as the remaining cash the landlord receives after paying all expenses for operating the property, and any costs for tenant work to get the space ready for occupancy. Effective rent is also often referred to as Net Effective Rent (NER). Effective rent is expressed in amount per area unit per time unit i.e. USD/SqM/mo. and is calculated over the lease duration. It is a common practice to take time value of money into account while calculating the effective rent. Base rent (quoted rent), tenant improvements (TI), rent-free period and escalation clause are the main variables. A