Internal Rate of Return

[Account Closed]

I am having a hard time calculating the IRR. Excel is not accepting my cash flows. I am lost. Can someone help? I have no idea why it keeps giving me the error. I have looked all over internet to find out what's wrong. Anyone have an excel spreadsheet I can use? Thanks.

[Jon Holdman]

IRR is just a calculation. Its no different than the calculation for buying a bank CD. You pay (for example) $1000. You get $60 each year for the next four years, then $1060 at the end of year five. That would give you 6%. In fact, in excel, IRR (-1000,60,60,60,60,1060) does give you 6%.

Of course, its easier to compute that than using IRR. IRR is useful with the cash flows are irregular. In your example, you do, at some point, need to get the $10K back. If you want to assume cash flow of $2600 plus a net of $12,000 on the sale, put that in. I get 25% with your numbers plus $14,600 for year five, which is pretty nice in most peoples book.

Yes, its speculation. So are those future year cash flows. Getting over $200 a month in true cash flow would be a very good rental. Even getting $100 is better than you can do in most places. Be sure you're not using phony cash flow of "cash flow = rent - PITI". A much better guess is "cash flow = rent / 2 - P&I". See the threads in the Rental Property forum about the 50% rule.

That radical jump in cash flow may reflect some wishful thinking, too. The best estimate of cash flow from a rental five years from now is the same as the cash flow right now. Otherwise, you're "assuming a lot".