Summary
Listen to this narration if you prefer
The internal rate of return (IRR) is one of the most common metrics used to evaluate the performance of a real estate investment. It is most certainly the most misused performance metric. The metric is regarded both in the form of the unlevered IRR (property-level IRR) and the levered IRR (equity IRR). On the most basic level, the IRR can be thought of as the average annual return an investment generates when looking back at the cumulative cash flows after the investment has been exited.
It is important to understand what IRR is, and what it is not. It is also critical understand its severe limitations. When you do, you will see that it is just one more “brick in the wall” that goes into making a sound real estate investment decision.
Excel Figures
Key Terms
Spoken Glossary Available On Amazon Alexa
Already using Alexa? Just say “Alexa, Open Commercial Real Estate Glossary”
If not, download the free Alexa app below and then add the “Commercial Real Estate Glossary” skill by clicking here, and then say “Alexa, Open Commercial Real Estate Glossary”
Text for accomplishing cushion.
To view the definition, click or press on the term. Repeat to hide the definition.
The annual rate of return that generates a NPV of zero for a stream of expected (or actual) cash flows; that is, the present value of the expected income exactly equals the present value of the investment. Generally thought of as the average annual return to equity over an investment period, as measured after exit. Can be measured on an unlevered or levered basis, the former assuming no use of debt financing, and the latter assuming use of debt.
The single discount rate, expressed as a percentage, that sets the NPV of expected future equity cash flows equal to zero. Generally thought of as the average annual compounded return to equity as measured after exit.
Assuming no use of debt financing in an investment, the annual rate of return that generates a NPV of zero for a stream of expected (or actual) cash flows. Generally thought of as the average annual return to equity over an investment period, as measured after exit.
The ratio, expressed as a percentage, of the original loan size to the appraised value of the property at loan closing e.g., a $7MM loan on a $10MM property = a 70% LTV.
Learn about REFAI Certification
< Prerequisite I | DCF and NPV Analysis Basics
Prerequisite III | Amortization Fundamentals >
Table of Contents
Index
Buy the Book
The Top Quarterly Publication for Commercial Real Estate Investors
Excel for Real Estate Certification
