Why CRE Investors Use IRR in Evaluating Investments
CRE investors look at many metrics when evaluating investment properties. They use metrics to calculate risks, cash flow, and the overall rate of returns. One of the most popular tools CRE investors use is the IRR or Internal Rate of Return.
The IRR figures the realized or expected average annual return of a property. It is a metric that can be pretty simple to understand, as long as you use accurate data when calculating. It can not comprehensively determine future unplanned costs, but it gives a firm basis for long-term planning.
Net Present Value (NPV) and IRR in Real Estate Investment
When using the NPV and IRR, you get the closest possible value of a property and its potential profitability. They work together to tell you how much money you can make and when you can expect to receive it.
In CRE investing, the NPV and IRR go hand-in-hand to help you look at the possibilities for a property. It considers different investment periods, market conditions, and other significant factors. It provides you with a more stable reference for profitability, depending on how long you plan to hold onto the investment.
CRE investing is a long-term commitment
IRR is popular in CRE investing because of its time factor. CRE investing is a long-term commitment. Being able to see an estimate of the annual growth of a property is crucial to the selection process.
CRE investors do not focus only on a property’s current market value. We consider how much we can make from it and how much it would be worth in the future.
The IRR provides values that will tell us how much and when we expect the returns.
IRR gives a standard basis of comparison
The IRR is a metric that focuses on a property’s profitability over a set period providing a standard basis of comparison for evaluating multiple investment properties you may be considering.
It helps you see your deals from a high level and shows you the actual numbers you need from each one. It gives you a bit of a bird’s eye view of the differences, even when they seem to have similar cash flow profiles.
Other metrics we use in evaluating deals, like the NPV, may not do that. It will tell you the value of your deal, but it may not show you numbers on the same levels as the IRR.
A standardized way of comparing properties will help ensure that you are going for the deal with great rates of return.
Using the IRR to evaluate your CRE deals
The IRR is not a stand-alone metric in evaluating a real estate investment. It will make comparison and decision-making more straightforward, but you should still use different tools.
If you want to be more effective in evaluating your CRE deals, you need to combine the IRR with other metrics. The most popular connection is the NPV, equity multiple, or cash-on-cash returns.
We can help you get those numbers dialed in. Get in touch with the Trajan Team today to start making waves in the CRE investing world!
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