Real Estate Valuation: NPV & IRR Analysis

NPV and IRR analysis can be applied to real estate valuation.

The standard decision rules apply, in that an NPV greater than zero or an IRR above the required rate of return indicates that the real estate investment should be undertaken.

IRR Challenges for Real Estate Valuation:

• IRR cannot properly value real estate investments where cash flows begin positive and become negative for a period.

• IRR may not properly rank mutually exclusive projects, when the size and timing of the cash flows are materially different.

After Tax Cash Flows (ATCF)

In order to perform a discounted cash flow valuation, analysts need to know a real estate investment’s after tax cash flows (ATCF) and after tax equity reversion (ATER).