Although it’s certainly difficult to predict how exactly the future will play out for the seniors housing sector, one senior living investor says one tool — the internal rate of return, on IRR — may be more useful than the often-used standard pricing metric, the cap rate.
“I think IRR is always a better metric to use because it encompasses all factors during the hold period including debt service, capital reserves, growth rates and terminal value,” Jason Punzel, managing director of Senior Living Investment Brokerage, told McKnight’s. Cap rate, he added, just focuses on either the trailing net operating income or Year 1 NOI but doesn’t capture all of the other items that IRR does.
Interest rates, which are at an all-time low right now, leverage and amortization also are factored in when calculating IRR, Punzel said in an SLIB blog post Tuesday.
“While there is no perfect tool to evaluate a senior living community, a longer-term approach is better than just looking at a snapshot in time,” he said.
