Commercial Real Estate Question

Question

Aly is a real estate professional representing a client who is interested in purchasing a neighbourhood strip mall. The property is being offered for sale at $5,000,000. The client plans on selling the property at the end of 5 years for $5,500,000. Aly projects the annual net operating income to be $250,000 for the first year$250,000 for the second year $260,000 for the third year$260,000 for the fourth year and $250,000 in the fifth year. Based on Aly's projections, what is the annual return the client can expect if they decide to purchase the property? You may need financial calculator for this. The answer is 6.82%. Please help with how to get to this answer.

Answer 1

The annual return they are asking for in this case is the IRR. It's a time value weighted return metric. IRR is the discount rate that makes the present value of future cash flows equal to zero. A $1 today is worth more than a dollar tomorrow, so this return metric is essentially telling us how much those future cash flows would need to be discounted to break even. If you would like me to break down this concept even further, let me know.