How Is IRR/XIRR Affected By Refinancing & Selling?

[Gabe Goudreau]

Hey Everyone, 

I've been building an Excel financial model that can quickly analyze potential value-add multifamily projects and I've run into an issue that I wasn't expecting - when calculating the returns, do you take into account both the refinance and sale proceeds, along with the cash flow? Or just one of the capital events along with the cash flow?  

Currently, when I include both refinance and sale proceeds, I get an unrealistic XIRR of 49%, while the average cash flow throughout the investment (7-year hold period) sat around 8%, and this seems incorrect to me. 

Please let me know some feedback, I can elaborate more if needed. Thank you! 

[Joshua Christensen]

Quote from @Gabe Goudreau:

Quote from @Joshua Christensen:

Quote from @Gabe Goudreau:

Hey Everyone, 

I've been building an Excel financial model that can quickly analyze potential value-add multifamily projects and I've run into an issue that I wasn't expecting - when calculating the returns, do you take into account both the refinance and sale proceeds, along with the cash flow? Or just one of the capital events along with the cash flow?  

Currently, when I include both refinance and sale proceeds, I get an unrealistic XIRR of 49%, while the average cash flow throughout the investment (7-year hold period) sat around 8%, and this seems incorrect to me. 

Please let me know some feedback, I can elaborate more if needed. Thank you! 

 I agree with David.

IRR is sensitive to capital events. Does your refinance include a return of capital at that time? If so, your IRR is going to be affected in a higher way. If you pay back all the upfront capital needed to fund the deal, the return becomes infinite after that, so that plays heavy.

When I underwrite my deals, I plan on 5 years without a refi.  It's a more "pure" approach, then if I like the numbers, I'll move forward.  A refi only juices my returns in that scenario if I refin in less than the 5 year projection.  Underwrite for the worst you'll accept and then perform to your best ability to maximize over time.

Yes, it includes a return of capital at that time. Here is an ss of what I have currently, this connects to other tabs of the model. The ($597k) is the initial equity invested, the $220k is proceeds from a refinance, and the $1.2 MM is sale proceeds. These are based on fictional numbers, assuming a 7-cap valuation at refinance & sale. I will run through an actual deal soon, just trying to fine-tune the model in the meantime. 

Find a model that you can run the exact same test numbers through that you trust has accurate measurements of IRR. Then model yours to a similar approach. It becomes your "control" to compare against.