7) A Value-Added Investment: A “for sale” property has high vacancy. Based on its weak NOI and the seller’s valuation, the property has a cap rate of 3%. Because of the risk (empty space), you are willing to purchase the property at a much higher (above market) going-in cap rate, even though the market has an overall cap rate of 8%. It is your belief that you have found some niche tenants for the property. In the first year, NOI is expected to increase by 100% as the property stabilizes. After that, NOI growth is expected to be 2.5% per year. In five years, you expect the going-out cap rate to be 7%. If you can pull this off, what IRR do you anticipate on this investment?
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