Modeling Question: IRR goes down but CoC goes up over time
Anyone have input on this? I've built out a model and Levered IRR goes down over time while both Levered CoC and Levered equity multiple go up in the Data Table. I'm staring at this not understanding why, and am curious if this is flat out wrong or if this could actually happen?
I'm looking at it and it doesn't make sense, so I'm a bit stuck. Unfortunately, I can't share the model so I'm asking for more theoretical responses I suppose. Any help is greatly appreciated.
drunk and bored, watching the presidents cup so I’ll take a stab at this. This happens in my development models all the time. If the majority of your profits are coming from the reversion your irr will most certainly decrease the longer you hold. It’s basic time value of money. The cash on cash should increase during the hold due to inflation. Coc is a single year measurement comparing a specific year’s cf to your initial investment. $100k cash flow in year 2 is a 10% coc on a $1mm investment. IRR measures all years’ cf and the reversion. The further you push out the reversion the lower your irr will be unless you have an insanely high rent growth assumption. If you have to question why your equity multiple increases over time then you might be in the wrong business.