Internal Rate of Return (IRR) – Defined

• Posted by Jeffrey King
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• Tags: appreciation, cash flow, irr, Property Analysis

What is the best metric to use for calculating the returns of an investment property?

This video explains Internal Rate of Return, or IRR, which is an important calculation used in real estate to compare investments to each other. When we invest in real estate, we are typically dealing with properties that provide cash flow streams. The IRR takes into account the benefit and timing of these cash flows and provides us with a great measure of our investments performance.

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Tagged as: appreciation, cash flow, irr, Property Analysis

2 Responses »

1. 

   pushpak

   April 25, 2012 • 11:03 pm

   Hi,

   How do you calculate reducing loan balance ($79,062.56)? and why dont you include interest paid rather in income stream. please advice
2. 

   Jeffrey King

   April 26, 2012 • 8:02 am

   Calculating the paydown on the loan is generally done with Excel. I use their formula CUMPRINC(rate, nper, pv, start_period, end_period, type). This formula calculates the cumulatve principal paid on a loan balance between two periods. With respect to your 2nd question, when we calculate the internal rate of return, we must first create the income statement for the property. The income statement comprises of the income (rents), less expenses (management, taxes, insurance, vacancy, maintenance), less debt service. Note that the debt service (or loan payment) includes both the interest and principal payment. With investment properties, the entire loan payment is deductable. Let me know if this answers your question and thanks for the comment!
   Jeffrey King