You’ve landed on this blog because you want to figure out what is the Internet Rate of Return or IRR and what it means to you when you’re starting on real estate investing. 

You can find a very brief video that’s helps you better understand IRR

In this blog, I’m going to talk about the definition of IRR and what it is in layman’s terms. I’ll also give you a quick example so you will have an idea how it comes into play when you’re planning to start on a real estate project. 

I’m Billy Keels and I want to continue to share tips and strategies with you that will help you to: 

  • Go out and make more money
  • Have more control of your free time 
  • Help you to live with much less stress    

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What is an Internal Rate of Return? 

According to Investopedia, Internal Rate of Return is defined as the metric used when you’re doing financial analysis to estimate the profitability of your potential investments. IRR is also called the economic rate of return. In a discounted cash flow analysis, IRR is the discount rate that makes the Net Present Value (NPV) of all your cash flows equal to zero. That’s why it’s also referred to as the discounted cash flow rate of return. 

Wow, that sounds like a mouthful! So let’s break it down and put it in layman’s terms. 

Typically, if you’re looking at the economic rate of return, you will also check it against the different types of projects. For example, you might be looking at investing in a mobile home parking investment or you want a new land development project. You’re looking at a number of different kinds of projects and you’re thinking which investment project would be of the best use for your capital. And so in general, the project that has a higher rate of return is more desirable for you to invest in. And you can use that for different projects in different industries. 

So we love talking about investing in real assets like real estate, and you’re going to have a discounted cash flow rate of return for the different types of projects. You also want to keep in consideration the risk factors that are on each type of opportunity. You need to do due diligence. The IRR is just one of those metrics that help you understand what is the rate of return on that capital for a specific project that you’re looking at over time. 

Here’s an example to illustrate how the internal rate of return is calculated. So imagine you have a real estate investment project and you’re going to place $100,000 into. 

$7,000 in year one from your initial investment

$8,000 in year two

$9,000 in year three 

$9,000 in year four 

$107,000 in year in five years

Now you could do some math and look at it and understand how much did you get on my initial investment. A lot of people look at cash on cash return which is exactly what happens after the first year. If you look at this, your $100,000 investment has generated $7,000. But if you look at it over time, when you do the math, there’s a complex formula you can use. 

 

How to calculate IRR - Quora

 

But what I recommend is that you look at excel spreadsheet, look for the IRR function, put this in an annual basis, and this will help you understand more about the growth of your capital over time.  

So when you put those figures together, actually the IRR is 8%, which basically means that over a period of time, you have 8% per year on that specific return. Just want to add that although some years, you will have higher returns, and in some years, you will have lower returns. 

Understanding the concept of IRR is important and this is one of the metrics I use all the time. I always look at the rate of return of my investment before I go into any type of real asset investing. Better understanding of the IRR helps me to also make better decisions especially when I got started in this business of long distance investing. It’s not the only factor but it’s one of the factors that’s very important. And look, I’ve been doing this while I’m working a really busy job, and knowing this metric has really helped my real estate or real assets business to continue to grow. 

If you really want to know how you can continue to work in a really busy job, like in sales, or consulting, or in the pharmaceutical (pharma) industry, and still build your own business, I’m gonna really make it easy for  you. 

If you just click HERE you can pick up the PLTO Secrets which gives you access to my roadmap on how I’ve been able to do it. You can learn from the things that I’ve done so you can get there much faster and you can avoid some of the mistakes that I made. 

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And if you want to keep having free education, one of the best places you can do that is to go to the GoingLong Podcast with Billy Keels. You can find this on different platforms; we have audio and video platforms as well. I would love to have you part of the community, so make sure that you’re subscribing to our KeePon Cashflow YouTube Channel, following us, and you’re definitely leaving your comments. 

So I want to hear what you think about this explanation of the IRR, and that’s it, this is Billy Keels, that’s my two cents for today, and as always, Hasta La proxima!

You can also check out my latest podcasts and collaborations here keeponcashflow.com/podcasts/