The Effect of Holding Period on Real Estate Investment Return

A critical variable in investment return that is rarely modeled is the length of the holding period. While this is generally true of all investments with uncertain returns over time, in a real estate setting there is an important relationship between profitability and the change in both the discount and capitalization rates over the holding period. The model here employs an oscillating business cycle with upward drift, something common to capitalistic economies with a positive interest rate. The table shows the internal rate of return (IRR) for different holding periods during the cycle(s). Exiting at points where the plot is above the plane represents positive net present values. Cycle phase can be manipulated for different cycle extremes. An arbitrary initial cash flow of $5,000 is used as a starting point. This does not affect the shape of the plot ($1 could be used), serving only to make realistic the NPVs shown on its axis.