Internal Rate of Return Calculations

6 Replies

Hi all,

I need some help here please.... I have followed all the suggestions from bigger pockets and the books I have read. I have created a business/investment plan along with operations manuals. Funny thing is I only own two pieces of property, my home and a condo, but hey I am ready to go into a multifamily next July when the condo comes available to be 1031 exchanged. In the meantime I am practicing analyzing properties. I understand what IRR is I just can't figure out how to calculate it? Is there programs/software out there that the sophisticated investors are using that help them determine this metric?

Microsoft excel has a function to calculate IRR. An HP10BII calculator has financial functions. I am sure there are apps for phones and software to emulate an HP 10BII

In CCIM training you get a massive spreadsheet which is basically a multi year APOD with IRR calculations for up to 5 years, You could build one yourself. Might be fun if you are a numbers geek. Wouldn't be fun at all for most people.

@Gavin Delmas get the book by Frank Gallinelli. Excellent book...has all the calculations you will ever need. "What Every Investor Needs To Know About Cash Flow" and 36 other key financial measures.

Hi all,

I need some help here please.... I have followed all the suggestions from bigger pockets and the books I have read. I have created a business/investment plan along with operations manuals. Funny thing is I only own two pieces of property, my home and a condo, but hey I am ready to go into a multifamily next July when the condo comes available to be 1031 exchanged. In the meantime I am practicing analyzing properties. I understand what IRR is I just can't figure out how to calculate it? Is there programs/software out there that the sophisticated investors are using that help them determine this metric?

Good questions, I remember when I took the first CCIM  course,

(in the 70's) they talked about the Internal rate of return and other mathematically systems to come up with a rate of return on investment.

Well...............I decided if I have to go thru all those calculations to find out how much I was making, I decided I did not have to be all that sophisticated. I figured that if I can't use simple math to determine out how much I was making by using basic arithmetic, I wasn't interested in having the CCIM behind my name and decided I'd do it my way, I wanted to know how much they owed,  and what's the market value to give me the potential equity that I was negotiating for.

I respect anyone who has competed all the CCIM courses, they are very smart, I on the other hand am Street Smart.  Show me the money and make it simple.

Charles

Thank you all for your replies!  I am starting to look into the suggestions and I have bought the book by Frank Gallenelli.  I think this will set me down the path I was trying to go.  Thanks again!

Hey @Gavin Delmas If you bought the book you can download his spreadsheet but the formula is actually really simple. Its the numbers to get there that the book really helps with.

In Excel (you can probably use google but I prefer the real thing) you simply use the IRR function like this:

=IRR(range) where range is your excel cells used for calculation.

In order to populate that range you simply put in your cash flow per year held. I.e.

-15000
1200
1200
1200
25,000

This range is saying that your initial cash flow in year 1 is negative 15,000 (lets assume you make nothing in cash flow that year and put down $15k for DP)

Then for 3 years you made $100/month which would yield $1200/year for those 3 years

Then in year 5 you decide to sell as a profit so you have $25k in profit (yes that would be amazing appreciation and doesn't deduct selling costs but go with me on this one..ha)

So, if you put those numbers in cells A1 through A5 you could calculate the IRR in cell B1 by writing =IRR(A1:A5) and it would kick out a number.

It should be 19.1% if the calc comes back right.

I hope that helps. Unfortunately you need Excel or some old school ways to do it with a calculator but once you understand the what for the IRR calculation it is simple to calculate with Excel.