What is IRR?
What is IRR and Why Should You Use It for Real Estate Investments?
Internal Rate of Return (IRR) is a key metric that helps real estate investors assess the overall profitability of a property over time. Unlike other metrics that focus on short-term returns (like cash flow or cap rate), IRR takes into account the time value of money and future sale proceeds, giving you a more comprehensive view of an investment’s potential.
Why Use IRR?
It Accounts for Time: IRR factors in how long you hold the property, making it ideal for long-term investments. It helps you understand how the property's value (and your investment) will grow over time, not just in the first few years.
It Reflects Future Gains: Unlike other metrics, IRR includes both the ongoing cash flow and the property's potential appreciation or sale price at the end of your investment horizon. This gives you a clearer picture of total returns.
It Helps Compare Investments: If you’re considering multiple properties or investment opportunities, IRR lets you compare them on equal terms, considering both short-term cash flow and long-term gains.
Bottom Line:
If you’re looking for a deeper understanding of your potential return on a real estate investment, IRR is a must. It combines cash flow, appreciation, and the length of time you hold the property into one figure, giving you a more accurate measure of long-term profitability.