1. What is Cost Of Internal Equity?

Cost of Internal Equity (r_e) in real estate measures the return required by equity investors based on the property's Net Operating Income (NOI) relative to the equity investment. It represents the minimum return investors expect to compensate for the risk of their investment.

2. How Does the Calculator Work?

The calculator uses the Cost of Internal Equity formula:

Where:

• \( r_e \) — Cost of Internal Equity (as decimal)
• \( NOI \) — Net Operating Income in dollars
• \( Equity \) — Equity investment in dollars

Explanation: This calculation shows what percentage return the property's NOI represents relative to the equity invested, helping investors assess the profitability of their real estate investment.

3. Importance of Cost Of Internal Equity Calculation

Details: Calculating cost of internal equity is crucial for real estate investors to evaluate investment performance, compare different investment opportunities, make informed financing decisions, and determine if the property meets required return thresholds.

4. Using the Calculator

Tips: Enter accurate NOI (annual net operating income after all expenses) and total equity investment amount. Both values must be positive numbers. The result is displayed as a percentage.

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good cost of internal equity in real estate?
A: A good r_e varies by market and property type, but typically 8-12% is considered reasonable for most commercial real estate investments, though higher-risk properties may require higher returns.

Q2: How does cost of internal equity differ from cap rate?
A: Cap rate is NOI divided by property value, while cost of internal equity is NOI divided by equity investment. Cap rate measures property performance, while r_e measures investor return on their specific equity contribution.

Q3: Should debt be considered in this calculation?
A: No, this calculation specifically focuses on the equity portion of the investment. For leveraged properties, the equity amount is the investor's cash contribution, not the total property value.

Q4: How often should cost of internal equity be calculated?
A: It should be calculated annually using current NOI figures and reviewed whenever there are significant changes in property operations, financing, or market conditions.

Q5: What factors can affect cost of internal equity?
A: Property performance (NOI changes), equity investment amount, market conditions, interest rates, property type, location, and overall real estate market trends can all impact the cost of internal equity.