IRR Advice??

[fundoffunds]

Reviewing IRR and just want to be clear on a few things regarding some real estate in some funds we are screening -

-on one of the properties an IRR is stated at 20.5% - the property was held for 4 years - now is that 20.5% return year on year of the equity invested that you receive or 20.5% over 4 years return? Seems low return on investment? Or due to discounting is that return beating all things like inflation / opportunity costs etc - say if you was discounting 6%? That's above that rate??

-Just a little confused as IRR doesn't calculate the return on each year but the total for the property - is it similar to ROE??

Just trying to be clear what the figure is actually???

 

[jkdxtr]

IRR is calculated on a per-period basis, typically per year. What function are you using to calculate it? If you are using Excel's XIRR function, then it uses the effective annual yield (i.e. 20.5% return PER YEAR). The function does not in itself take out anything for inflation, etc.

 

[fundoffunds]

The company is useing a real estate software package that just produces an IRR for the development and it is not stated if that is per year or for the development - just wondered how they are usually stated on papers for real estate?

 

[imp]

An IRR is generally the annually compounding total rate of return on the investment.

 

[jkdxtr]

Got you...yeah, if you just read it somewhere then it is definitely as imp said, annually compounded rate of return. So for your example, you would get just over twice your initial invested equity back at the end of the 4 year period.

As a side note, be cautious with plus 20% historical returns, due to increased construction costs over the last year, most funds are not forecasting that kind of success going forward despite past achievements.

 

[fundoffunds]

Imp - THANKS! That makes sense. Also makes sense to to run these on an annual basis so comparing IRR's makes sense.