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Real Estate Deal Analysis & Advice

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Aaron Valdez
  • Real Estate Consultant
  • Chicago, IL
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Discount Rate Higher for Leveraged Deals?

Aaron Valdez
  • Real Estate Consultant
  • Chicago, IL
Posted Oct 15 2008, 02:40

I am looking at two proformas for one investment and noticed the following:

1. The discount rate is 10 percent for an un-leveraged investment on the proforma and yields an IRR of 11 percent.

2. The discount rate is 15 percent for a leveraged investment on a proforma and yields an IRR of 69 percent.

Question: Why is the discount rate higher on a leveraged investment than that of an un-leveraged investment?
Question: Why do the unleveraged deal show a lower discount rate then the leveraged deal?

Thanks.

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