There is wide market consensus that cap rates are expected to rise in the near future. Below are some expectations for cap rates, rental rates, and expenses.
Property Type / Location Going-in Cap rate Going-out Cap rate Annual Rental Growth Annual Expense Growth
Warehouse 8.0 8.0 2.0 2.0
Full Service 8.0 9.0 2.0 2.0
Office Class B 8.0 8.0 2.0 1.0
Using a 5-year holding period I have calculated the unlevered IRR for each product type assuming – Income =$10,000 and Expenses =$3,000 in the first year (t=1). I assumed that NOI can be found by subtracting expenses from income in each year (NOI=Rent – Expenses).
1. Using the results above – why do the hotel and office building unlevered IRRs differ relative to warehouse unlevered returns.
Things to consider –
A – Are the difference primarily due to cap rates going up or down?
B – Are the difference primarily due to NOI growing faster or slower?
C –Are the difference primarily due to events (changes over time) in the space market or capital market?
Hotel versus Warehouse
A
B
C
Office versus Warehouse
A
B
C
2. Using Excel — Write down the amortization schedule for a 5-year fixed-rate monthly payment mortgage that is fully amortizing. The interest rate on the loan is 5% and it is a $425,000 loan amount at origination with no points or fees.
3. Consider the following fixed rate mortgage that was just originated.
Mortgage Description:
Full amortizing 30-year fixed rate mortgage paid monthly.
Loan Amount = $295,000
Interest rate = 5%
3 points paid
Lender application and origination fees =$3,000
Third party fees = $2,000
Prepayment penalty = 2%.
A. What is the monthly payment on this mortgage?
B. What is the lenders yield, if the loan is held to maturity?
C. What is the outstanding balance of this loan in 4 years?
D. What is the lenders yield, if the loan is paid off in 4 years?
