¿Do you calculate IRR when you buy an investment property?

[Account Closed]

Do you calculate IRR?

[Ben Leybovich]

The IRR as a mathematical formula only works with the closure of the CF loop, meaning money goes in, behaves as it does for a period of time, and then goes out. Only once the money is out can the IRR be calculated.

On BP it's commonly thought of that income-producing property is a "log-term hold". It may be, but most assets aren't held forever. The IRR requires us to project the exit, which requires much thought in many different directions.

While this is most important in syndicated opportunities because investors always want to know when, how, and why the money will be returned, I think you'd agree that this is a good approach for all, not just syndicated investments.

And, this is the reason for the IRR, and why it's the most important metric. Not only as a means of projecting returns, but as a process of tracing all of the moving parts to the end. You've got to know how you are going to get out before you get in!