What Does IRR (Internal Rate of Return) Mean?

The Internal Rate of Return, otherwise known as IRR, is a measure of performance that tracks returns earned by an investment over a period of time. 

People often confuse IRR with average annual return, but those two are not the same. Let me explain.

Let’s assume that you invest $100,000 into a syndication, and after 5 years, you profit $90,000 plus your $100,000 initial investment back. This would mean you made $90k over 5 years, which is $18k a year on average.

When you calculate IRR though, it is quite a bit different, because IRR calculations require the time of those returns as well. Meaning, did you get 18k every year, or was it a lump sum of $90k at the end? 

The sooner you see returns, the higher the IRR. The later you see returns, the lower the IRR goes, because it takes the value of time into account.

 

What is Considered a Good IRR?

It’s hard to say what a good IRR is because different deals have different risk profiles. Generally speaking, riskier deals tend to have higher potential returns but they also tend to have higher risks. 

Lower IRR deals tend to have less risk, less reward.

There is no correct answer here, it ultimately depends on your risk profile. We generally tend to value preservation of capital over everything else, and focus on investments that have lower risk profiles. IRR expectations also change with the market. In more challenging markets, you might see lower return expectations both in the stock market and the Real Estate market. 

Generally speaking, we target deals that net investors have 14% to 18% IRR per year after all General Partner/Sponsor fees. 

Having said that, that’s one return metric to look at, other things you should consider with investing is the Cash on Cash returns, tax depreciation, as well as risk profile of the deal.

If you are interested in looking at future Real Estate investment opportunities to invest passively in deals, click the link here to schedule a call to be added to our Model Equity Investor Club where you will get private access to limited investment opportunities as they become available! We have nothing to sell you on the call, it will be completely free with the intent of answering any questions you may have.

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