What is IRR in CRE Investing?

Evaluating the viability of an investment property is complicated. For example, one calculation is called IRR or the internal rate of return. Basically, the IRR evaluates the profitability of a given investment by its potential future value and is one metric to assess the risk of the investment. The internal rate of return or IRR in CRE investing is essential.

Calculating the risks to make sure you are investing in a property that can give good returns is how investment properties are evaluated. 

Internal Rate of Return or IRR

There are many things to consider as you look at a commercial property’s market value. You need to check its potential cash flow and market conditions. You will be looking at rent amounts, maintenance costs, cap rates, and inflation.

CRE investors want to invest in properties with high IRR. Higher IRR gives you the more significant potential for cash flow and profitability.

Understanding NPV to better understand IRR

NPV or the Net Present Value is a metric that is closely tied to IRR. This being the case, they work hand-in-hand, and you should have an understanding of both.

A property’s NPV will come from the difference between the market value and your investment’s total cost, including any future renovations that the property may require.

A good CRE investment is a property that will give you NPV that’s above zero.

What is a good IRR for a commercial real estate property?

In CRE investing, an IRR of 20% is high enough to give you great returns but it is not the only factor to consider.

For instance, a lower IRR may be suitable for the kind of investment you will make. A lower IRR calculation could also make sense if your initial upfront investment is lower. 

How do you calculate a commercial real estate property’s IRR?

The IRR is one of the many metrics you need to know to lower the risk on your investments. Calculating a property’s NPV and IRR can be overwhelming, especially when the concept is new to you.

Luckily, there are plenty of online resources for those unfamiliar with the formula yet. You can find Microsoft Excel formulas and online calculators to help make sure your numbers make sense!

Here are some of the most valuable calculators and formulas you can use when you’re looking at the IRR for your next commercial real estate investment:

1. Calculate Stuff

https://www.calculatestuff.com/financial/irr-calculator

1. The Calculator Site

https://www.thecalculatorsite.com/finance/calculators/irr-calculator.php

1. Investopedia Excel Formula

https://www.investopedia.com/terms/i/irr.asp

1. Investing Answers Excel Formula

https://investinganswers.com/articles/calculating-irr-excel-financial-calculator

CRE is a great way to make significant returns on your investments, especially when the numbers check out. Make sure to take a good look at the big picture and calculate the property’s IRR in your investment evaluation.

If you are not confident enough to do it yourself yet, the Trajan Team is here to help you figure it out. Get in touch with us, and we will help you make the right decisions and get your CRE investments going.

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