What’s an Internal Rate of Return (IRR)?
Tuesday, September 23rd, 2008It’s your return on an investment over time. It calculates the present value (ie the value today) of cash coming to you or leaving your pocket in the future.
In the case of evaluating a real estate investment, you have to project cash flow for a period of time into the future to give yourself a series ofcash flows to use in your calculations.
Then, because a dollar today is worth more than a dollar tomorrow, you discount the future dollars. The farther into the future, the bigger the discount.
IRR calculations are subject to big time manipulation in negotiations. By changing the sale price at the end of the analysis you can drive the IRR up or down dramatically.
Take a class from the CCIM Institute — on line or in person — to learn how to calculate an internal rate of return. Or just use Excel…but then you’ll never really understand how it works.
