This question shows how leverage influences IRR and that high leverage may incentivize default. 1. You pay $1000 for a property with 9% cap rate, keep it for 5 years, and sell at the end of year 5 at the same cap rate. The selling costs are 5% of the price. What is your IRR? Enter your answer in percent, but without percent sign. 8.15% 2. You are doing the same as above but instead of paying cash, you take a 70% LTV IO loan at 5% annual rate. What is your IRR? 10.95% 3. In addition to the loan above you take a mezzanine IO loan of $200 at 8% annual rate. What is your IRR? 12.87 The neighborhood is declining, so your selling cap rate is 11% in questions 10-13. You have limited liability: you can walk away anytime. If you walk away in year t, you also lose the net income in that year so that your cash flow for year t is zero. 4. You pay cash as in Question 1 above. What is your IRR? 4.97% 5. You take the loan as in Question 2 above. What is your IRR? 4.86% You take an additional mezzanine loan as in Question 3 above. What is your IRR? need answer for question 6