Author Topic: DO you use the IRR?  (Read 1339 times)

Overseas Stache

  • Stubble
  • **
  • Posts: 130
  • Age: 35
  • Location: Democratic Republic of Congo
DO you use the IRR?
« on: January 07, 2016, 03:28:33 AM »
Reading through some older posts I was reminded of the IRR as a tool that people often use to find the return that they will get on a certain property. It got me thinking if the IRR really is an accurate tool because it assumes that all cash flows are reinvested when they are received and they also provide the same rate of return as the initial investment. This doesn't seem to accurately portray what happens with most peoples real estate purchases.

Normally the cash flow builds up over time often several years and then is re invested in another property that may or may not have the same return as the first property.  Is there something I am missing? Is there a good reason as to why the IRR is better to use than just a plain ROI? I understand that the IRR is helpful especially for flippers because there is a set exit point with a projected value but for buy and hold investors what is the advantage to using this method?

Johnny Aloha

  • Bristles
  • ***
  • Posts: 315
Re: DO you use the IRR?
« Reply #1 on: January 07, 2016, 03:44:45 AM »
For buy and hold, I agree with you that the assumptions within IRR are probably not realistic for most scenarios.  However, calculating an IRR requires you to project an exit.  So, at least to me, the main value of seeing or calculating the IRR to examine the exit assumptions. 

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28255
  • Age: -999
  • Location: Seattle, WA
Re: DO you use the IRR?
« Reply #2 on: January 07, 2016, 03:49:02 AM »
I find it more accurate than a generic ROI, due to the lumpiness of cash flows and repairs.

Like JA says though, you have to have an ending value to calculate, and that can be tough to get right.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Overseas Stache

  • Stubble
  • **
  • Posts: 130
  • Age: 35
  • Location: Democratic Republic of Congo
Re: DO you use the IRR?
« Reply #3 on: January 07, 2016, 05:49:45 AM »
I find it more accurate than a generic ROI, due to the lumpiness of cash flows and repairs.

Like JA says though, you have to have an ending value to calculate, and that can be tough to get right.

But what about my question on the fact the cash flow is assumed to be reinvested from the moment it is received? Do you assume that the cash flow is reinvested at the same rate of return as the initial investment? For example if you have a property that is giving you a projected 20% ROI do you then assume that all cash flow will be reinvested at the same 20% return?