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Multi-Family and Apartment Investing

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Richard Haiber
  • Bowie, MD
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Discounted Cash Flow Analysis

Richard Haiber
  • Bowie, MD
Posted May 15 2015, 21:33

Quick question on discounted cash flow analysis for anyone who has any input on the topic.

Say we are dealing with the following hypothetical scenario:

T12 Actual Income: 1,000,000

T12 Actual Expenses: 475,000

T12 NOI: 525,000

Then say I'm assuming a 2% NOI increase per year for the next 5 years:

Yr1 NOI = 525,000

Yr2 NOI = 535,500

Yr3 NOI = 546,210

Yr4 NOI = 557,134

Yr5 NOI = 568,276

So, this gives us:

Year 1 CF = 210,000

Year 2 CF = 220,500

Year 3 CF = 231,210

Year 4 CF = 242,134

Year 5 CF = 253277 + 2,300,000 = 2,553,277

Total CF = 3,457,121

CFs were derived because my debt service on this property is  could be roughly 315,000 per year (5,830,000 purchase price with 25% down pmt and 6% interest over 30yr amortization).

That would leave roughly 4,000,000 as pay-off for the loan after 5yrs. of making P&I payments.

With a yr5 NOI = 568,276, that would give me a property value of roughly 6,300,000 using the same 9% cap that I bought with for simplicity's sake and a sale profit of roughly 2,300,000 (as reflected in the total Yr5 CF above).

Then say throughout my ownership I spend 500,000 total on cap ex to fix roofing, hvac units, etc. so say it worked out to 100,000/yr deducted from my CFs:

Now those numbers are fine and dandy, but I'm looking to see if I'm correctly applying discounted cash flow analysis as follows:

Actual CFs                               Discounted CFs

110,000                 (Yr1)                 98,113

120,500                 (Yr2)                 96,244

131,210                 (Yr3)                 94,128

142,134                 (Yr4)                 91,792

2,453,277              (Yr5)                 1,807,957

2,957,121             (Total)               2,188,234

*These CFs include cap ex deductions of 100k/yr

So, discounting CFs and considering cap ex gives me a difference of: 768,887 between the two columns.

Does this mean my IRRs are as follows?

IRR (actual CFs): 12.29%

IRR (discounted CFs): 5.06%

That's a huge difference and seems like the investment isn't worthy when considering discounted CFs. Or am I calculating discounted CFs wrong/using them wrong when trying to analyze a property?

If I'm out in left field I hope someone can help get me back into position as I'm here to learn.

***This is also all pre-tax as well.

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