Why do we think of reinvesting for IRR?

[Vlad Denisov]

Let's say we acquired property on a year 0 for 100k. Let's say we had a cashflow of 10k every year, for years 1 to 5 and on the year 5 we also sold the property for 130k. The question is why when we calculate the IRR, we do it as if all those cashflows were reinvested into the property? Because in reality when we get 10k in the end of year 1, we are free to do with it whatever we want and oftentimes we won't reinvest it in the property, right? So does it only make sense if we reinvest or I miss something?

[Marcus Auerbach]

@Vlad Denisov it is actually much more simple. IRR is considering all cash flow events, both positive and negative. You can spend the money on girls and boose or reinvest, doesn't matter.

The important consideration for you is what negative cash flow events do you have over 10 years? Do you need a new roof? Windows? Sewer lateral? New kitchens? Do you remodel before you sell? Once you understand this, you start to see why it is so much more important to understand the condition of the property.

New investors spend a great deal of time and energy to worry about rents and if they are $50 more or less, but turn a completley black eye to the roof, that has only 5 years left and will take $10,000 to replace (not to mention all the other items).

Generally sellers don't discount their dated properties enough to reflect the condition of major components. They will typically ask almost the same as the listing that had $50k worth of updates.