What is IRR??? What does it mean???

Question

What is IRR?? How can I understand that complex formula?? I know that it is a rate of return that factors in the time value of money, but still don't get it.

Henry Clark · Answer

@Aaryan PatelYour 14 years old.Looking at your past posts, your randomly picking topics and asking what is this?This is a poor way to learn about Real Estate investing, because it is disjointed and random.Recommend your read books. Ask for a Book reading list at your level. Don't ask for the Art of Syndications, as an example. Don't get specific on Real Estate types. Learn the fundamentals.Fundamental:A. World level. The US is a great place for Real Estate investing because: 1. Property rights, 2. Rule of Law, versus Rule of Man, 3. Open financial system., 4. Stable currency, 5. Foreign Ownership; This sounds simple, but this is why the US Real Estate market is great, compared to other countries.B. Investment level. Financing, analysis, Deal making, buying/selling, maintenance, property management, etc.C. Specific types of REI- Trailer parks, Multi Family, Warehouses, etc.D. Specific types of REI investing- developer, syndication, fix/flip, Hard Money, etc.The above is an academic learning path.At a personal level at 14 years old, I would talk with your parents and discuss the following:1. Take a loan out. Whatever you want to buy next, take a loan out with your parents. Monthly payments for 12 months. This simple act and what happens over the next 12 months will give you many lessons. Don't think in terms of success or failure. Learn why things happened to you. When you get done, ask yourself what would have happened if you paid cash.2. With your parent's oversight, take over maintaining your house. Plumbing, trash, lawn, roof, electrician, appliances, etc. Anything that comes up, have your Parents work through you to resolve. Example: If you need to replace a ceiling fan and need an electrician. With your parent standing back and giving guidance, have you find and select an electrician, schedule the replacement, select a new fan, make the payment, etc.3. Go through the process of buying a house. Pick one in your neighborhood first. Then one in a higher or lower value neighborhood. Sit with a realtor and have them take your through the offer and the close process. Find out why people win and lose offers.4. When you can drive a vehicle and if there is a trailer park nearby, buy a trailer and rent it out. Keep it low. Say $20,000 to $50,000 all in cost. You will be in charge of selecting and buying, financing, repairs, contracts, tenants, etc. This will teach you almost everything you need to know about real estate with low exposure. If you go to college do this and Trailer hack. Then do 2/3/4 trailers, etc. until you graduate or move.5. By now, start looking at different REI investment types and strategies.

James Storey · Answer

IRR takes into account cash flow, equity build up, and appreciation of an asset invested in. It's the rate or return that is equivalent to a compounding return. This way you can use assets like real estate and compare it to other types of investments in your portfolio. It is also the return that is compared to investors debt and equity stack to ensure that the investment is ample enough to pay back investors returns and debt service. It's one of the reasons why it is used so frequently with many investors. James Storey, CCIM

Chris Seveney · Answer

@Aaryan PatelIt’s the interest rate you are paying yourself compounded.It also works backwards in timeLet’s say you want $250,000 in 5 years with money growing at 12%. How much money would I need today for that amountNow think of it as as an asset. If I project to sell an asset for $250,000 in 5 years and I like to make 12% on my money how much should I pay.Where IRR comes in best use case is deciding what to do with an asset - for example do you sell your existing asset for a new one? Will it provide a better return?Hope this makes sense

Andrew C. · Answer

IRR means "Internal Rate of Return". It's calculated by finding the discount rate of money that, applied to a time-stamped sequence of investment/proceeds, would result in 0 at the end.What it gives you is a way to calculate the computed rate of return for an investment where the sequence of investment and returns isn't as simple as 'start with X, get Y every K months". With that, you can compare investment opportunities that have very different timelines or deal structures.

Brock Mogensen · Answer

IRR is a complicated metric, but in my opinion the best indicator to calculate ROI. The easiest way to explain it is it takes into account time value of money.The general rule of thumb is 15% IRR is the benchmark.

Taylor L. · Answer

It's best understood through experimentation with models. Make a quick model of a property - acquisition, cash flows, and sale proceeds. Calculate the IRR of your sample case. Then, change the values. Change their timing, frequencies, amount, and more. We use Excel to do the actual calculation because the formula is too complex to run mentally or by hand, but you can build an intuition of how it works through experimentation.