Hi Chad - you did a very nice job explaining a very valuable tool of IRR. I’m not quite sure how I stumbled across your video, but I was very impressed with this and I am a seasoned old retired medical device executive. My son is very interested in real estate investing and I’m going to encourage him to subscribe to your channels to learn. I love your teaching style too. You do a very nice job.
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.
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?
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.
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.
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.
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!!!
I have a question with the value after 5 years. Did you buy this house undervalued that allowed a greater appreciation of 3 percent a year or is my math wrong .. because it went from 250k to after taxes 400k
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!
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.
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 🤣😭😭
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
you need a few adjustments, especially when attempting to determine the IRR for a leveraged rental property: For instance, if the property is a conversion, you cannot simply consider the leveraged position, with the downpayment as the input, but instead must consider the difference between the conversion and the outstanding loan. Additionally, the way you applied the formula assumes that the investments are at equal time intervals, which is not quite true, the earning rate of the rental income is usually midyear, whereas the sale or purchase is a point in time. it is better to do the analysis at more granular time interval, say monthly, and the IRR formula can still determine the rate of return. Finally, the IRR does not actually provide insight into the ROC, or Risk Adjusted ROC.
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!
For more nerdy property analysis, check out my Cap Rate explanation video! ► ruclips.net/video/9X_1k1w6u3c/видео.html
Hi Chad - you did a very nice job explaining a very valuable tool of IRR. I’m not quite sure how I stumbled across your video, but I was very impressed with this and I am a seasoned old retired medical device executive. My son is very interested in real estate investing and I’m going to encourage him to subscribe to your channels to learn. I love your teaching style too. You do a very nice job.
Very informative. Takes in consideration much more than cap rate!....Go Tigers! :)
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.
very good video Coach thank you for your time are u aware of any videos to caluate I.R.R without excel ?
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.
Would love to see a breakdown of IRR vs NPV and the assumptions that feed both
Good feedback! Thank you.
Love your videos Coach! thank you so much!
Thanks for watching, Damian!
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?
Very good question that I would also like to know the answer to it.
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.
Lol the best . . . by far . . . best explanation of IRR!!
Thank you Mike!! I appreciate you watching and commenting.
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.
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.
Since we're going down this wonderful numbers path.....can we do a MIRR video, Coach?!!!!
On my list! Thanks for feedback
you solved my questions thanks
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.
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
I have a question with the value after 5 years. Did you buy this house undervalued that allowed a greater appreciation of 3 percent a year or is my math wrong .. because it went from 250k to after taxes 400k
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
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.
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 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 🤣😭😭
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
Legend!
🙏
you need a few adjustments, especially when attempting to determine the IRR for a leveraged rental property: For instance, if the property is a conversion, you cannot simply consider the leveraged position, with the downpayment as the input, but instead must consider the difference between the conversion and the outstanding loan. Additionally, the way you applied the formula assumes that the investments are at equal time intervals, which is not quite true, the earning rate of the rental income is usually midyear, whereas the sale or purchase is a point in time. it is better to do the analysis at more granular time interval, say monthly, and the IRR formula can still determine the rate of return.
Finally, the IRR does not actually provide insight into the ROC, or Risk Adjusted ROC.
Bueno
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.