__Internal Rate of Return - IRR - Real Estate__

The Internal Rate of Return or IRR calculation put simply measures the average annual

yield on an investment. For an income producing property, the internal rate of return

calculation uses the initial amount invested in the property, a series of projected cash flows

which are usually after-taxes, and a projected After-Tax Sales Proceeds amount in a given

year.

Lets look at an example. If we were calculating the internal rate of return for an income

producing property 5 years in the future, we would use the Initial Investment amount or the

amount of money put down on the property, the projected After-Tax Cash Flows for each of the

five future years and the After-Tax Sales Proceeds in year five, the final year, to calculate an

average annual return on our initial investment amount over the five year period. The On

Target real estate model calculates an After-Tax IRR in years 1 through 10 using this method.

You should be aware of the following when using the IRR to measure the return on an

investment. If in year 5, you have a return of 20 %, the internal rate of return calculation

assumes that you made 20% on your cash flows for each of the five years. You may or

may not be able to make 20% on your cash flows. The IRR calculation can therefore

sometimes exaggerate your average return on an investment.

The Property Analysis real estate model also calculates a MIRR, or modified internal rate of return.

When calculating the MIRR for Future Wealth with the real estate model, we

allow you to enter what rate of return you think you will make on your cash flows. The

MIRR for Future Wealth can therefore provide a more accurate return on cash flows for

each year since you determined the (interest) rate at which the cash flows get ran forward at.

The On Target 2.01 real estate analysis software calculates both an internal rate of return

and a modified internal rate of return. The internal rate of return is calculated for each year

over a ten year period and is based on investor growth rate assumptions for income,

expenses and appreciation.

**Tien and Jim**

*Your Real Estate Partners*