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Testimonials |
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"I just used your software to purchase a huge complex. The
sellers did not know what to say except that I must have used a
very expensive software package."
Jeffrey P.,
Clinton,
IL
"I liked your software so much that I ordered a copy for my
friend."
Chet V.,
Ozark, AL |
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Definitions
Internal Rate
of Return
Modified Internal Rate of
Return (MIRR)
Net Operating Income (NOI)
Loan to Value Ratio
(LTV)
Cash on Cash Return
Capitalization Rate
Gross Rent Multiplier
(GRM)
Debt Coverage Ratio
(DCR)
Real Estate Terms |
Internal Rate of Return IRR
When you have an investment that creates
differing amounts of annual cash flow, you need to determine your rate of
return using the Internal Rate of Return (IRR). The formula for computing
the IRR is very complicated but essentially an IRR is the rate needed to
convert (or discount) the future uneven cash flow to your initial investment
or down payment.
A very simple example is say that you will
have a cash flow of $10 in year 2. Assume that in order to generate that
cash flow, you had to invest $50. Thus you have an out flow of $50 the
first year, and an inflow of $60 in year two ($10 earnings plus the $50
return of your initial investment). In order to convert or discount the $60
back to today's dollars to equal $50, you must use a discount rate of 20%.
Thus, your IRR is 20%.
Another way to look at it is the internal
rate of return (IRR) is the discount rate at which the "net" present value
of future cash flows is zero (discounted future cash flows = starting
investment amount). The "net" meaning you subtract your initial investment.
Leveraged vs.
Unleveraged IRR
When you use debt to
purchase a property, then you are using leverage. The program computes your
IRR based on how debt impacts your cash flow. The program automatically
backs out interest and debt payments and calculates an Unleveraged IRR
assuming 100% down payment.
You can compare the leveraged and
unleveraged IRR's to determine how debt is helping or hurting your
investment results.
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