How to calculate IRR on a 145 unit asset?

Question

I have a property package on 145 unit apartment complex. One of the potential investors wanted to know what the IRR was on the project. How can I calculate IRR on this 145 unit project?

Nick L. · Answer

@Michael Norris

There are plenty of tutorials on IRR, NPV and related concepts if you google for them.

At its simplest, IRR can be defined technically as the rate of return of a project that brings the net present value to zero. More meaningfully, it is a measure of how much better a project is than the alternatives.

For example, if I am an investor and say that my minimum rate of return (IRR) for a project is 8%, and you are offering a project that brings 10%, it is attractive. If you are offering 6% I will look elsewhere.

Joel Owens · Answer

I use rentalsoftware.com and let it do the calculations for me.

I paid 99 bucks one time. It might cost more now. Excel based Macro'sand creates reports in .pdf format.

Some people just like playing around in Excel and creating things but this software does all I need it to and was created by a CPA who also is an investor themselves.

Jeff Kehl · Answer

It's been awhile since I've done IRR. But basically it's just a function in Excel you do on a stream of cashflow. So you need a proforma showing cash going out the first year and cash coming in each year of the hold period and the cash returned at the end. Here's a simple example where I buy a house for $100k, get $5000 in net cash each year for 4 years and then sell for $120k.

8% -100000 5000 5000 5000 5000 120000

If you had bought and sold for the same price your IRR would be = COC return.

8% -100000 5000 5000 5000 5000 120000

If you had bought and sold for the same price your IRR would be = COC return.

Steve Vaughan · Answer

It's a GIGO formula. The best estimates of appreciation, rent rate inflation, tax benefits, COC, cashflow, etc are all you can plug in. If the inputs are garbage, so is the output. It won't be a definite hard number to bank on. Be sure and disclose that your numbers are estimates based on the best available data at the time.

Maybe some other pros (not that I'm one) that deal in large apts and syndication will chime in to help. Do you have a lot of experience with this type of asset @Michael Norris? Providing a few numbers may be helpful, too. Good luck!

Michael Norris · Answer

Thanks Joel, rentalsoftware.com looks very good!

Michael Norris · Answer

Thanks Nick. Yes, Investor is a financially sophisticated person. I am trying to make a good impression. IRR on a large asset is something I have not done before.

Michael Norris · Answer

Steve,

Multifamily is new to me. I am working with a group that have been doing multifamily for several years and they are "watching over my shoulder" when it comes to purchase. I was trying to figure out IRR on my own a little.

Thanks

Nick L. · Answer

@Michael Norris

Like @Jeff Kehl and @Steve Vaughan said, IRR is a simple formula that depends on the interplay between a lot of values that are very hard to guess. As a result you can make the IRR say pretty much anything you like by changing some assumptions.

Since your investor sounds like a financially sophisticated person, a way to impress him or her might be to run a "sensitivity table" that shows various IRRs depending on the inputs. There's a decent thread on it here if you have some Excel experience: http://www.mrexcel.com/forum/excel-questions/61463....

Of course you can use pre-built Excel models like @Joel Owens said, but you should still understand IRRs so you can answer your investor's questions.

How to calculate IRR on a 145 unit asset?

How to calculate IRR on a 145 unit asset?

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