Help with IRR questions for an existing portfolio + Renovation.

CFA General
#1

Hey guys,

I’m kind of confused about something and perhaps you guys can help out. Say I already own a portfolio of properties and i’m debating on whether or not to renovate it. I want to determine my return on the renovation. The caveat here is that I plan to sell the property in 5 years from now. How will I determine the IRR? Renovation: 30k Current portfolio Value: 1M Cash flow after expenses - Forecast after renovation(NOI): 20k

Cash flow after expense - Currently recieving before renovation (NOI): 10k Proceeds from Sale (5 years from now): 2M Given these assumptions, what would you do on your cash flow analysis. I’m not sure if i should include the current house value in the cash flow or not … since I already own the portfolio. Solution 1: Year 1: - 30k Year 2: 1k Year 3: 1k Year 4: 1k Year 5: 2M OR Solution 2 Year 1: - 1.030M Year 2: 1k Year 3: 1k Year 4: 1k Year 5: 2M What would the correct IRR cash flow? (gut feeling tells me its the 2nd one).

#2

I think the IRR should look like this

Year 0: -30k

Year 1: +10k

Year 2: +10k

.

.

Year 5: +10k + (additional value achieved from sale due to renovation).

So if the property would sell for 2m as is but 2.5m after reonvation, your year 5 cashflow would be 60k.

#3

this is a pretty hard question

#4

Made some assumptions based on your question.

Year without Renovation Renovation alone After Renovation (Combined)

Y0: -1000K -30K -1030K

Y1: +10K +10K +20K

Y2: +10K +10K +20k

Y3: +10K +10K +20K

Y4: +10K +10K +20K

Y5: +10K+2000K +10k +20K+2000K

IRR: 15.64% 19.86% 15.71%

#5

If you’re looking at the IRR of the reno, you do it like this:

t0 = -$30k

t1 = $10k

t2 = $10k

t3 = $10k

t4 = $10k

t5 = Estimated sale price with reno in 5 years - Estimated sale price without reno in 5 years (Likely less than the $1M total difference from t0 to t5, as some overall appreication in the property is likely without the reno)

I’d be happy to invest in such a project for sure. But the numbers are unrealistic.