With a wide range of investment opportunities springing up in the market every day, finding the right asset to invest in can be difficult. This is especially the case if you are someone who has a busy lifestyle. Maybe you’re a medical professional, who doesn’t have the time or energy to look into investment portfolios, and stay on your toes at all times. Or, a tech executive or sole entrepreneur who wishes to have a steady stream of dividends without much hassle.
You can manage your investments with little effort and stress by investing in passive real estate instead. The wealth creation opportunities in real estate are massive. You may have even noticed your friends and colleagues raving about its high returns.
Want to know why this is so? Read ahead to learn more!
Internal Rate of Return – Understanding The Basics First
Let’s have a look at what the Internal Rate of Return is and how it plays a role in wealth creation. The Internal Rate of Return, or the IRR, is the metric used to compare and analyze the return on your investments as time progresses. Think of IRR as the rate of growth that you expect a real estate investment to generate annually.
The internal rate of return (IRR) is an important metric because it is commonly used in financial analysis to estimate the profitability of one potential investment versus another potential investment.
In general, the higher the internal rate of return of an investment, the more desirable it is. IRR can be used to compare varying types of investments, making it an important metric that should be part of your investment criteria when analyzing a real estate opportunity. When comparing investment options, the investment with the highest IRR probably would generally be considered the best.
From a technical standpoint, IRR is a discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis. IRR is the annual return that makes the NPV of the investment equal to zero.
IRR VS RETURN ON INVESTMENT (ROI)
ROI is an investment metric for analyzing the total return, over the entire life of the investment. It is the percent increase or decrease of the total growth, from start to finish, for the investment.
IRR on the other hand, is the annual growth rate for the investment.
REAL ESTATE PROFORMA
A real estate pro forma is used by buyers and sellers to project the potential IRR of a real estate investment. Before you invest in a multifamily syndication or any other real estate investment, make sure to review the proforma and verify the data used to calculate the IRR.
The proforma should provide the income, expenses, and other deductions necessary to calculate the IRR.
HOW TO CALCULATE IRR
The easiest way to calculate the IRR of an investment is to use the IRR function in Excel or Google Sheets. Excel does all the work for you. All you need to do is enter your initial cash outlay for the investment and expected inflows.
IRR ANALYSIS
If you invest $100,000 and receive a return on $250,000 how can you determine if this was a good investment?
The answer lies in examining the time taken to receive this return. If the return is for a span of 5 years, the average IRR is 20.11%
But what if the investment was for a span of one year. In this case the average IRR is a huge $150%.
The higher the IRR and shorter the time period, the more profitable the project is going to be.
IRR Summary
- IRR is the annual rate of growth that an investment is expected to generate.
- IRR is a great metric for comparing potential rates of annual return over time of different investment opportunities.
If you are looking to invest in real estate but not sure of who to get in touch with, then Ginkgo Holdings is the premier private equity firm that can help. We offer rewarding and lucrative real estate investment options where you don’t have to worry about managing the property yourself. We do this by following a simple and systematic procedure.
So, what are you waiting for? Contact us for more information. You can even drop us a message. Our team will get back to you shortly and help you kick start your wealth creation journey the right way in no time!
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