Internal Rate of Return

Dear Native Metal

I am still new at all this but from what I understand it is not the same thing. The COCR that Steve talks about refers to the cash return that you will recieve on your overall invested funds. IRR meanwhile refers to the net overall return that you will recieve from the property taking into account changes in capital value as well. Hope that this helps

regards Zimonya

Zimonya

Aaaah! My favourite analysis tool, and I am still waiting for someone to show me I’m wrong. It is totally different to cash-on-cash return, which really only looks at the initial cash flow.

This is where I get long-winded, so duck out now if you’re already bored.

IRR is an indicative value which shows you what annual interest rate you would have to be paid (say on a bank fixed deposit) in order to earn the same return, based on a series of cash flows.

These cash flows do not have to be even, as they would be for an annuity. However, the cash flows must occur at regular intervals, such as monthly or annually. The IRR is the interest rate received for an investment consisting of payments (negative values) and income (positive values) that occur at regular periods.

The great thing is that IRR is available on Excel as a standard function, so you just set up your cash flow model over as many years as you like and apply IRR to it. No need for fancy software where you have little control over the inner workings and assumptions.

Here is an example based on Excel help:
Suppose you want to start a restaurant business. You estimate it will cost $70,000 (negative) to start the business and expect to net the following income in the first five years: $12,000, $15,000, $18,000, $21,000, and $26,000.

The cash flow series is as follows:
$-70,000, $12,000, $15,000, $18,000, $21,000 and $26,000, respectively.

Your investment’s IRR after
four years: equals -2.12 percent
five years: equals 8.66 percent
etc. [of course using Excel]

On property investment simulations I allow for capital growth as an inflated or future value FV figure at the end of the period being simulated, eg. at the end of 10 years, based on present capital growth estimates what would the property sell for? Not that you are necessarily going to sell, but the value is still there (theoretically) either through sale or refinancing.

I picked this up from Dolf de Roos, and it is the most useful analysis tool that I have come across so far. Cash-on-cash it too short term for me. What is really great, is that you can build your own spreadsheet with the data on all the properties you are looking at, put in all the income, expenditure, financing etc. dope, apply IRR and presto, you have an evaluation tool that highlights the best option in the bunch.

Any objections?

Hi Glenetti,

someone who speaks my language!

… i totally agree about the IRR, the CoCR is fine but more appropriate for uses such as knowing, what a small renovation and the increase of rent from it, and how long it will take to get your money back with the use of CoCR, but IRR is the best way to go, for me, i will not use any other tool, and that with IRR’s, you can also predict the growth of an asset vs its repayments if its negative geared…

Cheers,
sis

People 4get that by saving just $3 a day & investing it sensibly
over a working life, you’ll end up with around $1 million