IRR

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From: Tim New


Hi,
I have been a property investor for three and a half years now and am the proud owner of two units.

Some thoughts:

The second unit was purchased through a well know property investment agency who informed me that my unit would be "positively geared" i.e. making money - in consideration of the tax refunds and depreciation schedule etc. Their spreadsheet showed this to be true.....However, it is at odds with my moderately educated calculations and also with the PIA software outcomes (which incidentally I prefer to believe!). I would just like to gain some confidence in my investment and would like to hear some thoughts on what a good IRR should be.

Thank you,
Tim.
 
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From: Webmaster (Somersoft)


A "good" IRR is one that is better than alternative returns on other investments or other properties. The returns on all investment classes will change over time as changes in inflation and other factors impact interest rates and capital growth rates. The other thing that a "good" IRR must be considered with is the level of risk. For example if the pre-tax equivalent of the IRR on an investment property was less than the interest being offered on government bonds, it would be a no-brainer. At the other end of the spectrum, when an investment is cash positive from the outset, the IRR is infinitely high (you cannot calculate the return on investment when no investment is actually made) it does not necessarily mean that this investment is the answer to all your dreams. It could be that the equity being built up in the property is negligible. I would recommend that you look for an IRR that is at least better than the long-term average growth plus rental yield of median priced properties (around 15% for the past 20 years in Australian capital cities), but that you also look at the other indicators such as the Net Present Value and the Real (inflation-adjusted) IRR. Both indicators are given in the IRR dialog of the PIA software.
 
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