Understanding Internal Rate of Return

[Gabe Goudreau]

Hey BP Community, 

Recently I've been trying to wrap my head around what exactly IRR is, and how to compute when underwriting a deal. From my understanding, it is the rate of return that an investment offers based on the NPV and takes into account the time value of cashflows, appreciation, and potential sale - Is this a correct understanding? Is this number more applicable for syndicated deals, or can it be applied to regular multifamily, commercial, and development deals? I would appreciate some input, thank you in advance.

[Aaron W.]

IRR is basically a return where the timing of cash flow is taken into consideration in its calculation. It is extremely difficult to do by hand. Excel has a very formula to get it done quickly as long as you have cash returns for each year and amount invested handy.

You really can't calculate IRR until everything is said and done. They are all projections of estimated returns.

A couple of good BP articles on IRR are below:

https://www.biggerpockets.com/...

https://www.biggerpockets.com/...

https://www.biggerpockets.com/...

Best of luck!