Reading through certain forum posts and articles, the concept of Internal Rate of Return and Net Present Value was introduced to me, by a number of different people, both here on BP, and elsewhere.
I've been doing some extended research into trying to understand the concepts, and I have a pretty good understanding of both the theory and the use, but not necessarily the actual calculations. That being said, could anyone try to further clarify for, how to use the CAPM to calculate the discount rate for the NPV figure?
And it got me thinking, as investors, are the majority of us calculating our returns based on the net present value of future cash inflows (i.e. future rents on buy and holds)? For flips, is the internal rate of return used as a metric for judging whether or not a project is worth undertaking?
I have no idea, so don't mistake my comments for criticisms of the way you have engaged in your particular business model...I am genuinely curious. Because I have only heard very few discuss their rates of return in this manner, but the majority seem to be doing well for themselves; our goal of financial independence seems to be achievable for most. And yet these concepts aren't tossed around with the importance that some online sources seem to give them credit for.
In my view IRR, NPV, and MIRR are used to compare different types of investments that have substantial cash flow pattern differences. Most people on here are comparing different properties within the same investment type. For this reason using COC, Cap rates, GRM, and DSCR are usually sufficient when comparing different properties with similar cash flow patterns.
Looking forward to seeing other replies.
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