Understanding Internal Rate of Return (IRR)

internal rate of returnOne of the more commonly used measures by real estate investors to gauge a rental property’s financial performance is internal rate of return (or IRR); primarily because it considers time value of money.

An advantage to investors because with time value of money consideration both the amount of the cash flows generated by an investment property as well as the timing of those cash flows can be gauged. Bottom line?

Internal rate of return provides a good way for investors to determine whether the property will be profitable in the future as compared to other real estate investments.

How IRR Works

Basically, IRR considers the “present value” of all future income streams a property might produce and reveals the rate of return an investor might expect on the amount of cash outlay required to acquire the property.

The concept is logical.

The money invested to make a purchase today has value in today’s dollars. Whereas money collected in the future typically has less purchasing power than it would today for a variety of causes such as inflation rate.

So it makes sense that a real estate investor would want to equate the purchasing power of tomorrow’s revenue dollars with the purchasing power of today’s investment dollars to get a truer sense of rate of return.

Think of internal rate of return as a reverse application of a savings account.

You invest into a savings account knowing the amount of investment and yield (IRR), and then compute a future amount. Whereas with rental income property, you know the amount of investment and anticipated future amounts, and then compute the yield (IRR).

In the context of savings and loans, the IRR is called the “effective interest rate” and expresses the “future value” of your investment when “compounded” at regular periods over time at that rate.

In the context of real estate investing, the IRR expresses the “present value” of your future earnings at regular periods over time “discounted” at that rate.

In other words. Rather than applying an “effective interest rate” to today’s dollars to calculate tomorrow’s savings account dollars, you look to IRR to express the “interest rate” that today’s dollars will earn you based upon income streams planned to occur at regular periods in the future from the investment property you plan to purchase.

Rule of Thumb

Generally, real estate investors will go ahead with the real estate investment when the internal rate of return is less the cost of capital required to make the investment.

Whereas, he or she typically might pass if the IRR is more than the cost of the investment and a better rate of return can be had on some other investment.

 

Agent 6: Software Updated

marketing package modification

Marketing Package with AMR

ProAPOD has updated its real estate agent software solution, Agent 6. To obtain your update simply login to your account from the ProAPOD website and click the Download button under Updates.

Here are the changes.

The Marketing Package has been modified to include the “Average Monthly Rents” (AMR) for each unit configuration. This entry was removed from the marketing package report several years ago due to space restraints caused by some other modifications made at that time. However, it was brought to our attention that having the average monthly rents for each configuration displayed in the report was helpful, so we brought it back.

The issue occurred because we added the option to select “Warehouse” as a type of property on the PropInfo form in the former update. With this option available we had to provide enough space on the marketing package to account for a large amount of square footage (which can occur with warehouse space) and as a result had to do away with the average monthly rent display.

Upon further consideration, though, it seemed better to remove the “Warehouse” selection option from this software solution in order to once again display the AMR for each unit configuration in the Marketing Package because we feel that users of Real Estate Agent 6 will benefit more.

Inflation Rate Index Updated in Real Estate Calculator

The ProAPOD Real Estate Calculator has updated the inflation rate calculator through May as indexed by the Consumer Price Index (CPI) published by the Bureau of Labor Statistics (BLS). This means that you can compute the buying power of the dollar starting as far back as 1913 up to June 2012. You will find the inflation rate calculator under Time Value.

Customers of the calculator have to do nothing; simply go online, login, and start calculating.  And of course, there are no additional costs when the real estate calculator is updated. Why not compute some inflation rates for yourself; you might be surprised to see how much you will have to spend today for the same products and services you did just a few years ago.

Thank you for choosing ProAPOD.

How to Add a Shortcut to ProAPOD’s Login on Your Desktop

If you regularly are using one of ProAPOD’s real estate investment software solutions or Real Estate Calculator, you might find it helpful to place a shortcut to our Login page directly on your desktop. This way you can save time by avoiding having to open the browser, then the website, and then logging in.

The process is quite simple if you are using either IE or Firefox as your browser.

  1. Open the browser (IE/Firefox) and browse to the ProAPOD website then click Login to open the page
  2. Re-size the browser so that you can see both desktop and browser
  3. Drag and drop the small icon on the left of the address bar on your desktop. The shortcut will be created. Simply rename it to whatever you wish.

desktop shortcut

Hope this helps.

Ouch, Our Commissions Have Fallen 33.2% Since 2000

Sad but true, according to the Consumer Price Index (CPI) published by the Bureau of Labor Statistics (BLS), inflation rate has climbed 33.2% since 2000. But to put it into the proper perspective, let’s consider how that affects our real estate commissions.

Say, for example, that you double-ended a property in 2000 at a sale price of $300,000 and collected a 6% commission. You would have received $18,000 to spend on any goods or services you choose. In 2012, however, if you were to make that same transaction, you would still collect $18,000, but thanks to inflation, you could only buy about two thirds the goods and services. Put another way, you would need $23,978 today to purchase the same goods and services you purchased in 2000. So you would have to do without some of the goodies, or would have to cough up almost $6,000 to make up the difference.

For your information.

“Inflation is a rise in the general level of prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services, and vice versa. Inflation Rate is the annualized percentage change in a general price index (normally the Consumer Price Index) that is used to measure price inflation over time”.

So You Know

Inflation rate is just one of a number of calculations you can make and learn with my ProAPOD Real Estate Calculator. It’s extremely easy to use and incredibly fast (the inflation rate calculation used in this article took me less than 10 seconds). Why not check it out at
http://www.proapod.com/real_estate_calculator.asp