Is there a target IRR real estate investors typically look for?

Question

I'm somewhat new to the real estate world. I'm coming in from a background in private equity, where limited partners typically target a ~25% IRR. And that IRR is key to modelling when approaching investors with business plans and structuring the investment.

Is there a similar target IRR that investors expect for real estate funds?

Is there a similar target IRR that investors expect for real estate funds?

Taylor L. · Answer

I've found most passive investors are targeting a mid to high teens IRR right now. TBH when someone is raising money and projecting in the 20%s I get very skeptical right now.

When I check their underwriting the projections are typically lofty and depend on hitting rent bumps very quickly at a low CapEx number. I prefer a conservative position right now, as long as we do have room for upside.

Your mileage may vary however, as this is based on value add multifamily syndication deals that I see.

Ben Leybovich · Answer

On a deal that is correctly underwritten, it is very difficult to pencil anything about 14%-15% IRR on a 10-year basis. This can translate into about 17%-18% IRR on a 5-year, if there are no additional hurdles or catch-up for the sponsor.

Joseph High · Answer

@Shawn McCoy Thanks for reaching out!

Not sure what terminology is used to describe the risk profiles of investments in PE, but for real estate, each risk profile will have a general IRR range. That being said, core assets are going to be around 8-12%, core plus assets are between 12-15%, value add are 15-18%, and then opportunistic are 18%+.

Jonathan R McLaughlin · Answer

@Shawn McCoy depends a bit on what volume you are talking. One offs in tertiary markets can be very high IRR over 5 years at a 1-4M range for example but it’s a bit of a needle and haystack thing. Seeing more and more family office type approaches where it’s a search for particular assets using local partners.

John Fortes · Answer

Seeing conservative investments starting at 13% or more. If the rent bump is aggressive per @Taylor L., I'm usually avoiding those. As every investor is different and has a different risk tolerance, this is primarily a conversation with your investors to find out what will work for you and your opportunities to put in front of them.

Happy investing!

Dave DeMarinis · Answer

@Shawn McCoy the standard deviation on R/E IRR is much tighter than PE because the underlying asset (real property) is more stable in value than a business enterprise undergoing the PE value add. Or said in finance terms, the Beta is much higher in Private Equity than most value add real estate.

As @Ben Leybovich said, the shorter the hold (5 yr) the higher the IRR because the large majority of value add is created in the first 3 years. After Year 5, you generally are only growing income if revenue increases faster than expenses AND cap rate expansion (hard to defy the market here).

Finally, in real estate, as Taylor said - any real estate offering with an IRR >20% is a red flag right now. One caveat, if it is a development deal, especially if it includes getting entitlements - the above would not apply. It isn't my area of expertise but I would expect it to be more similar to PE, if not even higher Beta.

Kim Lisa Taylor · Answer

@John Fortes is right on. Pundits in the multi-family sector are saying we’re no longer in the time of 20% plus annualized returns. Anything that hits the mid-teens is a home run. I am also seeing this reflected in clients’ deals. Many are starting to offer lower preferred returns as well; 6-7% instead of 8%. I asked a very large syndication company (owns billions in real estate) what they are offering and they said 5-6% in years 1-3 and then increasing to 8% after that. Food for thought.

Roni E. · Answer

The PE world is usually high risk and if you are comfortable with that you can achieve high returns but also get burnt. A 14% IRR is 100 times better than a complete wipeout. I think you have to look at 1. What is your hold period 2-3 years or 5- 7 years. 2. Asset type, commercial, multifamily and so forth. 3. What type of quality asset you want to focus on C class or A class.

As always do your home works but I think to be somewhat safe as there is always substantial RISK, a 14 to 15% IRR in 4 to 5 years without a major renovation or major price increase in rent can be a safe play.

AJ Shepard · Answer

When we create a proforma to be sent out to our investors/LP we always look for a property with a possible 15% or more IRR. However, it's not easy to find a deal that can give you a high CoC and IRR at the same time, value add is the best strategy. So tweaking some details on your proforma will be your top workaround if you like a yes from your investors.

Lee G. · Answer

Are taxes implications, because they are so specific to the investor, generally excluded in IRR calculations?  It would appear to me that this would a fatale variable that would reduce the value of IRR.  I realize there is something to be said for consistency in the calculation as you apply to different investment.

Is there a target IRR real estate investors typically look for?

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