# ¿Do you calculate IRR when you buy an investment property?

8 Replies

@Account Closed no, I do SFH and base it on cash flow. I try to buy in nice areas that can appreciate but I am not going to guess how much.

IRR becomes more important and used more frequently when evaluating larger projects. However it still relies on a guess as to future values and rents. However you should be able to make a Conservative educated guess.

@Account Closed . IRR is more speculative in my opinion, however when doing a syndication or trying to get investors, it's vital to show them IRR so they can see their potential investment lifecycle. It can also be leveraged for commercial financing (same logic as for the syndications).

@Account Closed said if you are partnering with other investors, especially if you are soliciting investors for a syndication, they are going to want to know their expected returns. They also want to know when they get their money back out. To say something like "This investment is expected to produce 12% IRR over a 5 year period" is pretty specific information for them to make a judgment with. So IRR becomes more important when investing with others.

The IRR as a mathematical formula only works with the closure of the CF loop, meaning money goes in, behaves as it does for a period of time, and then goes out. Only once the money is out can the IRR be calculated.

On BP it's commonly thought of that income-producing property is a "log-term hold". It may be, but most assets aren't held forever. The IRR requires us to project the exit, which requires much thought in many different directions.

While this is most important in syndicated opportunities because investors always want to know when, how, and why the money will be returned, I think you'd agree that this is a good approach for all, not just syndicated investments.

And, this is the reason for the IRR, and why it's the most important metric. Not only as a means of projecting returns, but as a process of tracing all of the moving parts to the end. You've got to know how you are going to get out before you get in!

As others have said, IRR is commonly used when syndicators present deals to passive investors. But it is used with other metrics like cash-on-cash return, equity multiple, etc.