The internal rate of return (IRR) is a metric that is usually used to evaluate the profitability of an investment. It is the annual return an asset is expected to generate, expressed in percentage. In the context of multifamily real estate, IRR is a significant consideration for investors as it allows them to understand what they can expect from an investment opportunity and helps them to make wise decisions about where to allocate their capital. IRR considers the total earnings from the day you purchased the property to the day you sell it (and the timing of cash flows received).
Beyond the cash flows received and the timing of those cash flows, there are several other factors that can impact the IRR of multifamily investments including the occupancy rate, the rental income generated by the property, operating expenses, capital expenditures, financial costs, the exit strategy, and the expected appreciation in the property’s value.
Let’s discuss some of the factors that can affect the IRR:
IRR is impacted by the expected appreciation in the value of the property. Properties are expected to appreciate over time and are more likely to have a higher IRR because investors will be able to sell the property for a higher price in the future. However, appreciation of the property can be affected by economic conditions, the location of the property, and the strength of the real estate market.
The interest rate and terms of the loan used to purchase the property can also affect the IRR. A higher interest rate or poor loan term can increase financing costs and lower the IRR.
Rental income generated by the property also affects the IRR for multifamily real estate. Properties that create higher rental income may have a higher IRR if the cash flows distributed increase, all things being equal.
The cost of maintaining and operating the property, such as property taxes, insurance, and utilities, can eat into cash flow and lower the IRR.
IRR is impacted by the level of debt financing used to fund the acquisition of the property. The use of leverage can increase the IRR of an asset, as it allows investors to generate a higher return on equity. It is essential to note that the use of leverage increases the risk of an investment as investors are exposed to factors like changes in interest rates.
The percentage of units in the property that are rented out at any given time can have a significant impact on IRR. A higher occupancy rate means more rental income, which can lead to a higher IRR, all other things being equal.
Overall economic conditions such as GDP, inflation, unemployment rate, interest rate, etc. can also affect the IRR if distributions and the timing of distributions are impacted.
Benefits of IRR
The key benefit of IRR is that it accounts for the time value of money, meaning it takes into consideration the fact that money today is worth more than the same amount in the future. This is what makes IRR a more accurate measure of the true profitability of an investment. Another significant benefit of IRR is that it allows for a direct comparison of investment opportunities with different cash flow patterns, lengths of investment, and different sizes, as well as different investment types.
In conclusion, the IRR is a widely used and important metric in finance and investment analysis. This metric helps investors measure the profitability of investment opportunities and helps them compare different investment opportunities, making it a valuable tool in the investment decision-making process.
We recently launched a new webinar on Understanding Key Metrics for Multifamily Syndication where one of the Cash Flow Champs Managing Partners, Paul Senior, discusses the crucial metrics that you need to know in the real estate space, and how to talk about metrics with partners and investors.
Watch the full webinar here– https://youtu.be/pz9nMnUXSQQ
How You Can Get in On the Action
Cash Flow Champs is a privately held investment company that focuses on acquiring and managing opportunistic and value-add multifamily real estate properties. The company specializes in repositioning well-located assets in emerging markets surrounded by positive demand drivers such as population growth and job growth.
Cash Flow Champs partners with entrepreneurs and busy working professionals interested in investing in real estate but who lack the time to navigate the process. Alongside our partners, we aim to bridge purpose and profits in a manner that allows us to improve the lives of the residents in our communities and the neighborhoods where we operate.
In the words of Robert Kiyosaki, the poor and the middle-class work for money. The rich have money work for them. If you are an individual that wants to build and maintain generational wealth through real estate, all while making a positive impact on the lives of residents and the communities where you invest, we’d love to explore opportunities for synergies.
Schedule a brief call with us so we can get to know you better, understand your life goals, and to determine where synergies may exist.
This information presented on this site is for informational purposes only and does not constitute an offer or solicitation to sell shares or securities in the company or any related or associated company and is not a recommendation to pursue a specific investment opportunity. Any such offer or solicitation will be made only by means of the company’s confidential Offering Memorandum and in accordance with the terms of all applicable securities laws and other laws.