Internal Rate of Return (IRR)

[TEG]

Hi,

I am an investing newbie (2 IP's so far), and am interested in people's view of IRR when making investing decisions.

What are people's views of an acceptable IRR for a Resi investment?

I have been playing with PIA for an IP, and I have been getting
IRR around 17 - 20%.

Would this be considered a good IRR ?

For the people that use PIA (or other software that calculates IRR), do you go by the IRR as the 'trigger' for investment decisions. i.e if IRR > 20%, I am interested, if > 22% it's definitely a good deal and I will buy?

Is IRR the most important value people use when making an investing decision.

Thanks,
Chris

 

[TheShuffler]

Chris, I am a massive believer in IRR calcs however there are a lot of future 'assumptions' that you need to input to calculate it. What time period are you basing your IRR on? Are you talking a development IRR over a short period or a passive, longer term IRR?

If it's a short term project, IRR is definitely important however don't forget to look at the actual profit $$ plus the profit as a % of outlay. Some people can get caught up in a good IRR however forget to realise that for the risk, the total $$ profit is not worth it.

Again, double check and triple check all your assumptions and that you are happy with your ultimate selling price which will have a pretty big impact on your IRR.

Cheers

 

[TEG]

Thanks TheShuffler.

Does anyone else use IRR as the most important value when comparing two IP's in PIA?

i.e is this the best way to compare two similar IP's against each other?


Thanks,
Chris

 

[boods99]

Agree with TheShuffler,

The longer the time period used, the lower the IRR will be. Also, the longer the time period you use, the more unlikely the actual future cashflows will be anywhere near your estimations. In this case, IRR is useless.

Be careful also that if you have years that result in a negative net cashflow, due to renovations, excessive maintenance etc, then you are able to arrive at two different IRRs. Best to use MIRR in this case.

Boods