The Internal Rate of Return is an indicator that measures the Efficiency and Desirability of a real estate investment property.
It is normally used to rank several prospective real estate investment properties an investor is considering. Assuming all other factors are equal among the various real estate investment properties, the real estate investment property with the highest Internal Rate of Return would probably be considered the best.
For a real estate investment property, the internal rate of return or IRR calculation uses the initial amount invested in the real estate investment property, a series of projected cash flows which are usually after-taxes, and a projected After-Tax Sales Proceeds amount in a given year.
The Internal Rate of Return is a trial-error calculation which finds the
Different discount rates need to be tried until the total of the net present values of all years equals the initial investment.
STEP 1: Internal Rate of Return
Internal Rate of Return (IRR) = 11.94%
STEP 2: Year 1 Net Present Value
Year 1 NPV= $625.32
STEP 3: Year 2 Net Present Value
Year 2 NPV= $718.20
STEP 4: Year 3 Net Present Value
Year 3 NPV= $819.79
STEP 5: Year 4 Net Present Value
Year 4 NPV= $875.61
STEP 6: Year 5 Net Present Value
Year 5 Cash Flow= Rental + Sale
Year 5 Cash Flow= $1,500 + $125,000
Year 5 Cash Flow= $126,500
Year 5 NPV= $71,961.11
STEP 7: Add up all the Net Present Values
STEP 8: Results
As you can see if you use 11.94% to discount the future cash flows the the total discounted cash flows ($75,000) matches or approximates the initial investement ($75,000), that's the measure that tells you 11.94% is this investments Internal Rate of Return.
|Gross Rent Multiplier||Cash on Cash Return||Profitability Index||Internal Rate of Return||Debt Coverage Ratio|
|Break Even Ratio||Loan To Value Ratio||Capitalization Rate||Net Cash Flow||Real Estate Risk Management and Metrics|