How to Calculate Internal Rate of Return (IRR) for Real Estate Investing
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- Опубликовано: 30 июл 2024
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This video explains what an internal rate of return (IRR) is and how you can use it to evaluate real estate investments (including how to use the formula in an Excel or Google Slides spreadsheet). You'll also get practical examples of both unleveraged and leveraged internal rates of return and the pros and cons of using the IRR formula.
Get a free copy of the IRR spreadsheet: www.coachcarson.com/irr
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TIMESTAMPS:
0:00 - Intro
0:25 - What is IRR?
2:33 - Warren Buffet & Aesop's Fable
4:20 - IRR example NO debt
10:57 - IRR example WITH debt
14:22 - Pros and Cons of IRR
20:17 - Closing thoughts
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For more nerdy property analysis, check out my Cap Rate explanation video! ► ruclips.net/video/9X_1k1w6u3c/видео.html
Love your videos Coach! thank you so much!
Thanks for watching, Damian!
Hey Coach Carson! How did you calculate the "After tax net income" and "After tax rental cash flow per year"? Could you break down the math? Thanks!
Awesome explanation and teaching style, great spreadsheet. Been a fan a long time.
Thank you Pam! Good to hear from you.
you solved my questions thanks
Would love to see a breakdown of IRR vs NPV and the assumptions that feed both
Good feedback! Thank you.
Great breakdown! I find I have to be careful with.Calculations because it I am reliant on spreadsheets, I tend to miss the most fundamental elements such as the property being in an area that I do not want to be in etc. With all that said, I appreciate the education on a more technical analysis of the numbers!
Good point. Can't overanylze numbers and miss the big picture
Love the podcast and in the middle of your new book which brought me to this video. Great stuff! How does the IRR change if you want to refinance a property?
Thank you!! The IRR would likely increase if you refinanced and pulled out cash. So you'd get a higher return. But your risk of loss goes up with more debt so just do it carefully.
Always amazing content. Thumbs'd. Still haven't done a deal yet 😕
In any case just wanted to say I think IRR can return various values if there is a negative number in the series of cash flows. In which case MIRR would be the better option
🙋♂️MIRR video please!!!
Good point about that other limitation of IRR. Thanks for the comment, Victor.
Great vid thanks for the content, quick question what if we just want to see the IRR on a 3 year plan or more than 5 years?
you can change the sales date to 3 years in that case or you could extend it out to more than 5 years. I often do 10 years for my own IRR analysis of real estate deals.
Lol the best . . . by far . . . best explanation of IRR!!
Thank you Mike!! I appreciate you watching and commenting.
what if the house is bought on 1997 and I plan to lease the property for 15 years. Option 1 leaseout immediately with lessee to renovate or Option 2 Lessor to renovate then lease out. Is the year 0 the year 1997? And from year 1 (1998) to year 26 (2024) no income, then this year -2025 is considered year 27. Is this correct in computing the IRR?
Legend!
🙏
Random Question- what market analysis is used to determine the end sale price of the property to know that it can sell for 400 at the end of year 5?
Good question. The future is always a guess. But with residential properties you could take today's value and apply an appreciation rate, like 3%, using a future value calculator to figure out the year 5 value estimate. With income properties you can do the same thing but you have to estimate not only rent and income appreciate but also the future cap rates. It's very difficult if not imposible to know it for sure.
I’m so confused how you got the annual average of $8,232, $8,479, etc on the Leveraged IRR and I’ve spent 30 mins trying to figure it out!
Please explain and hopefully you see this and respond asap cus now I’m in this rabbit hole and my brain hurts 🤣😭😭
Since we're going down this wonderful numbers path.....can we do a MIRR video, Coach?!!!!
On my list! Thanks for feedback
Are taxes, insurance, maintenance etc. included in the monthly payment? Or is it just the mortgage?
Thank you.
for my calculations "mortgage" payment is just principal and interest. Does not include taxes, insurance, etc. I know some actual mortgage payments include escrows for taxes/insurance, but I choose to leave it out of the analysis to be consistent across all properties.
In order for the IRR to take into account the time value of money, dont we have to input inflation?
IRR can be compared to inflation rate but it's not adjusted for inflation. In other words, if you make a 15% IRR and inflation is 5%, your REAL return (after inflation) is 10%. That's why in investing you've always got to be above the inflation rate long run. Otherwise, you're losing buying power.
Bueno
Is it possible to have a Cash on Cash that is greater than your IRR?
I guess if you lose money on the price, yes! So maybe an old mobile home that you rent until it falls apart and throw it away
@@CoachChadCarson never seen anyone use IRR and COC together like this. Great vid. Thank you for education
What’s discounting rate used in IRR?
IRR is the discount rate in this case. The technical definition of IRR is: the discount rate at which the NPV is $0 for all the future cash flows.
I'm not sure if anyone will be able to answer this, but I've been stuck on this for a while. Why exactly would a higher IRR be more risky? Why would a lower IRR be safer? What about it determines the risk
It’s not the IRR that makes it more risk. When you leverage your money in real estate, you put less cash down and take out larger loans. This means with less money you can experience the same appreciation yielding a higher IRR generally. Leveraging or taking out large loans is more risky because you have higher payments that you need to make. So really it is taking out large loans that is risky and happens to also frequently increase IRR
@@xxbeastlyturtlexx Thank you I really appreciate it ! Makes a lot more sense
Thanks coach. I’ve published an app on iOS called “Rental & Mortgage Calculator”, I hope it’s useful for your audience.
Any feedback is highly appreciated.
Keep up the good work!
Why does the format change from rental inputs to financial when doing debt vs no debt. That threw me way off.