So I have been all over these boards and other websites and can't seem to find the right answer to this question. I am doing real estate valuations with the standard 10 year forecasting model. My question arises in trying to figure out the IRR and whether I combine the first year's revenue stream (the negative purchase cost with the positive first year's NOI) or separate the negative purchase cost into "Year 0"? So let's assume I bought the property in February 2011 for 1,000,000. I will sell it in year 10 for $1,200,000. That first year (2011) after I bought it, i had an NOI of $40k. Then in year 2 (2012), I earned $51k, in year 3 (2013), I earned $52k, and so on as follows:
Purchase Price: $1,000,000 and Sales Price (Yr 10): $1,200,000
Year 1 NOI: $40k
Year 2 NOI: $51k
Year 3 NOI: $52k
Year 4 NOI: $53k
....
Year 10 NOI: $59k + $1,200,000
so does my IRR equation in excel look like this:
1) ($1,000,000.00)
2) $40,000.00
3) $51,000.00
4) $52,000.00
5) $53,000.00
6) $54,000.00
7) $55,000.00
8) $56,000.00
9) $57,000.00
10) $58,000.00
11) $1,259,000.00
And therefore run: IRR(1:11) (where the first input is technically "year 0")
Or does it look like this:
1) $(960,000.00)
2) $51,000.00
3) $52,000.00
4) $53,000.00
5) $54,000.00
6) $55,000.00
7) $56,000.00
8) $57,000.00
9) $58,000.00
10) $1,259,000.00
And therefore run: IRR(1:10) (where I've combined the purchase price and the NOI for the first year)
Any help would be appreciated because as you can see, you get two different answers (for these particular numbers, if you run it where you separate out the Purchase cost into Year 0 (and therefeore have 11 inputs) as I did in the first example above, you get an IRR of 6.73%. If you combine the Purchase cost and first year's NOI (and therefore have 10 inputs) like the 2nd example, you get an IRR of 7.70%.
Purchase Price: $1,000,000 and Sales Price (Yr 10): $1,200,000
Year 1 NOI: $40k
Year 2 NOI: $51k
Year 3 NOI: $52k
Year 4 NOI: $53k
....
Year 10 NOI: $59k + $1,200,000
so does my IRR equation in excel look like this:
1) ($1,000,000.00)
2) $40,000.00
3) $51,000.00
4) $52,000.00
5) $53,000.00
6) $54,000.00
7) $55,000.00
8) $56,000.00
9) $57,000.00
10) $58,000.00
11) $1,259,000.00
And therefore run: IRR(1:11) (where the first input is technically "year 0")
Or does it look like this:
1) $(960,000.00)
2) $51,000.00
3) $52,000.00
4) $53,000.00
5) $54,000.00
6) $55,000.00
7) $56,000.00
8) $57,000.00
9) $58,000.00
10) $1,259,000.00
And therefore run: IRR(1:10) (where I've combined the purchase price and the NOI for the first year)
Any help would be appreciated because as you can see, you get two different answers (for these particular numbers, if you run it where you separate out the Purchase cost into Year 0 (and therefeore have 11 inputs) as I did in the first example above, you get an IRR of 6.73%. If you combine the Purchase cost and first year's NOI (and therefore have 10 inputs) like the 2nd example, you get an IRR of 7.70%.