You miss 100 percent of the shots you never take, and if you think it’s expensive to hire a professional to do the job, wait until you hire an amateur. FOR OVER 20 YEARS, I HAVE WORKED EXTENSIVELY WITH OWNERS AND BUYERS IN LAND, COMMERCIAL AND INVESTMENT REAL ESTATE IN PHOENIX, TUCSON AND THROUGHOUT ARIZONA. PLEASE LET ME KNOW HOW I CAN HELP YOU. Call me if you want to sell your property and need an estimated value. Phone / Prefer cell: 520-975-5207
Office: 480-948-5554 or email me walterunger@ccim.net. – What is a CCIM.
In Business and in Life you don’t get what you deserve, you get what you Negotiate.
CLICK HERE TO VIEW ALL MY LISTINGS.
Are you ready to sell or purchase your Land or Commercial Building in Phoenix, Scottsdale, Maricopa County and Pinal County, Arizona, please call me?
Walter Unger CCIM – cell: 520-975-5207 – walterunger@ccim.net
WHY IRR MATTERS: EVALUATING REAL ESTATE INVESTMENT RETURNS
By The ArborCrowd TeamFeb 24, 2017
One of the most common metrics used to gauge investment performance is the Internal Rate of Return (IRR). It is one of the first performance indicators you are likely to encounter when browsing real estate crowdfunding opportunities.
Typically expressed in a percent range (i.e. 12%-15%), the IRR is the annualized rate of earnings on an investment.
A less shrewd investor would be satisfied by following the general rule of thumb that the higher the IRR, the higher the return; the lower the IRR the lower the risk. But this is not always the case.
While there is no concrete definition tying asset class to IRR, the following IRR ranges can be generalized as follows.
- Core: 8% – 12% IRR
- Value-Add: 12% – 18% IRR
- Opportunistic: 18+% IRR
But there are several crucial factors to consider when evaluating what makes a “good” IRR for your own needs. This article will break down:
- The math behind IRR.
- How IRR and net profits vary based on when cash flow is distributed.
- Why the IRR should never stand alone when you’re evaluating an investment.
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IRR 101: THE MATHEMATICS
IRR is closely tied to another investment metric, the Net Present Value (NPV), which is essentially the difference between an investment’s market value and its total cost1. To understand IRR, we must first understand NPV.
Net Present Value
Any investment with a positive NPV will make money, just as any investment with a negative NPV will lose money. When looking for a real estate deal to invest in, you are only going to be presented with deals where the sponsor is projecting a positive NPV, as no one is going to bring a deal to market that is expected to lose money. But how would a sponsor determine if their proposed deal has a positive projected NPV?
For example, let’s say you are evaluating whether to invest in the value-add repositioning of an apartment community. To calculate NPV, the sponsor would first look at what comparable renovated properties are selling for — that’s the market value. Next, the sponsor would estimate the cost of buying, renovating, operating and selling the property — that’s the total cost. If total cost is less than the market value, they have found a positive estimated NPV.
Ok, Back to the IRR
Above we simplified IRR as the “annualized rate of earnings on an investment.” Now that you have a better understanding of NPV, we can present a more telling definition of IRR and look at how it’s calculated.
IRR = The interest rate that makes the NPV equal to zero
Put another way, an IRR is the interest rate that makes the market value and total cost equal. To determine IRR, we can take the NPV calculation below, define NPV as zero and solve for “r”.
NPV=−C0+∑i=1TCi(1+r)i
Done yet?
Luckily, Excel does the calculation for us, enabling a quick determination of IRR based on cash distribution over a projected period. Below is an illustration of how IRR works for a $25,000 investment in a project with a projected hold period in the 5 year range.
3
The table on the left gives a quick overview of the cash flow over the five years, which for this particular scenario equates to an IRR of 13.94%. The right side shows what is going on behind the scenes for each year in terms of the Return On Investment and the Return Of Investment. An investor would earn $15,000 in net profits over five years in Scenario A. Not bad, right?
NOT ALL EQUAL IRRS ARE EQUAL
Well, imagine if the IRR was closer to 21%, and the investor could have seen a net profit of $15,000…wait, what? That’s right, a deal with the same investor net profit can have a varying IRR depending on when the cash flow is distributed. Take a look at Scenarios “A” through “E” below.
4
While all five scenarios have the same net profit of $15,000, the IRR values range from 13.94% to 26.22%. The scenarios with cash flow weighted towards the beginning of the hold period (“D” and “E” above) will end up having higher IRRs, as the metric is essentially the “time value” of money.
Just as deals with the same investor net profit can have different IRRs, deals with the same IRR can have wildly different profits. This is demonstrated by Scenarios “F” through “I” below.
5
Now is one scenario above better than another? It really comes down to what you are looking to get out of the deal. Scenario “I” might have the lowest investor net profit, but the investor is getting the vast majority of their investment back and Year 1 and could put those funds to work somewhere else. Scenario “A” is perfect for someone who has no need for that money for a few years, and they are rewarded for their patience with a higher net profit.
So what does this all mean for an investor looking to get involved with real estate through crowdfunding? The IRR is just one metric to examine when performing due diligence on a commercial real estate investment opportunity. When combined with other metrics — such as the Equity Multiple, in particular — the IRR can paint a much more accurate picture of how the investment is expected to perform.
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Footnotes:
[1] Ross, Stephen A., Randolph Westerfield, and Bradford D. Jordan. Essentials of Corporate Finance. Boston, MA: McGraw-Hill/Irwin, 2004. Print. SEE IT ALL: https://www.arborcrowd.com/education/why-irr-matters-evaluating-real-estate-investment-returns/?gclid=Cj0KCQjwkZiFBhD9ARIsAGxFX8Cu_G9GQhBa7XuZtLvSbUdBwGcAI28tipFMEynC57shcNN4gXClH4AaAoqbEALw_wcB
FROM ME: FOR OVER 20 YEARS, I HAVE WORKED EXTENSIVELY WITH OWNERS AND BUYERS IN LAND, COMMERCIAL AND INVESTMENT REAL ESTATE IN PHOENIX, TUCSON AND THROUGHOUT ARIZONA. Now is the time, if you are thinking of selling or purchasing your Land or Commercial Building in Phoenix, Scottsdale, Maricopa County, Pinal County, Arizona / Office / Retail / Industrial / Multi-family / please call me on my cell 520-975-5207 or e-mail me walterunger@ccim.net. Investors and Owner / Users need to really know the market today before making a move. The market has a lot of moving parts. What is going on socio-economically, what is going on demographically, what is going on with location, with competing businesses, with public policy in general — all of these things affect the quality of selling or purchasing your Commercial Properties, Commercial Investment Properties and Commercial and large tracts of Residential Land Therefore, you need a broker, a CCIM (Certified Commercial Investment Member) who is a recognized expert in the commercial and investment real estate industry and who understands your needs. I am marketing my listings on Costar, Loop-net, CCIM, CREXi, Catylist, and various other web sites. I also sold hundreds millions of dollars’ worth of Investment Properties / Owner User Properties in Retail, Office Industrial, Multi-family and Land in Arizona and therefore I am working with brokers, Investors and Developers. I am also a CCIM and through this origination ( www.ccim.com ) I have access to marketing not only in the United States, but also international
What is a CCIM. In Business and in Life you don’t get what you deserve, you get what you Negotiate.
Are you ready to sell or purchase your Land or Commercial Building in Phoenix, Scottsdale, Maricopa County and Pinal County, Arizona, please call me?
contact me if you want the me to get you the value of your property.
CCIM DEAL MAKERS FALL 2020 THE BIGGEST DEAL WALTER UNGER, CCIM, WITH WEST USA COMMERCIAL DIVISION IN PHOENIX REPRESENTED GCG HOLDINGS LLC IN ITS $29.43 MILLION SALE OF GOLD CANYON GOLF RESORT AND SPA IN GOLD CANYON, ARIZ., TO GOLD CANYON MJ LLC.
CCIM DEAL MAKERS FALL 2020 THE BIGGEST DEAL / WALTER UNGER, CCIM, WITH WEST USA COMMERCIAL DIVISION IN PHOENIX REPRESENTED GCG HOLDINGS LLC IN ITS $29.43 MILLION SALE OF GOLD CANYON GOLF RESORT TO GOLD CANYON MJ LLC.
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PRESS RELEASE: Gold Canyon resort sells for $29.4M. Walter Unger CCIM from West USA Commercial Division Brokered the Transaction.
http://walter-unger.com/gold-canyon-resort-sells-for-29-4m/
Walter Unger CCIM
Associate Broker
West USA Commercial Division
7077 E MARILYN RD.
Suite 200, Building 4.
Scottsdale AZ, 85254
Phone: 480-948-5554
Cell: 520-975-5207
History of Arizona from 900 BC – 2017 -Timeline.
History of Arizona from 900 BC – 2017 -Timeline.
History of Arizona from 900 BC – 2017 -Timeline.
WHY PHOENIX? AMAZING!!! POPULATION IN 1950 – 350 K PEOPLE; “NOW 5 MIL”. – “5TH. BIGGEST CITY IN USA”
Walter Unger CCIM – walterunger@ccim.net – 1-520-975-5207 – http://walter-unger.com
Timeline of Phoenix, Arizona history
Facts of Arizona – year 1848 to 2013
CLICK HERE: Arizona Opportunity Zones As We Understand /maps. Interested!!! Please contact me.
Feel free to contact Walter regarding any of these stories, the current market, distressed commercial real estate opportunities and needs, your property or your Investment Needs for Comercial Properties in Phoenix, Tucson, Arizona.
Walter Unger CCIM
Associate Broker
West USA Commercial Division
7077 E MARILYN RD.
Suite 200, Building 4.
Scottsdale AZ, 85254
Phone: 480-948-5554
Cell: 520-975-5207
FOR OVER 20 YEARS, I HAVE WORKED EXTENSIVELY WITH OWNERS AND BUYERS IN LAND, COMMERCIAL AND INVESTMENT REAL ESTATE IN PHOENIX, TUCSON AND THROUGHOUT ARIZONA. PLEASE LET ME KNOW HOW I CAN HELP YOU PLEASE CALL ME
CLICK HERE TO VIEW ALL MY LISTINGS.
Also Call me if you need an estimated value of your Property.
Call me if you want to see a map with what is in the Construction Pipeline for Apartments.
Prefer cell: 520-975-5207, or email me walterunger@ccim.net. CLICK HERE TO VIEW ALL MY LISTINGS.
Check out my professional profile and connect with me on LinkedIn.
Walter Unger CCIM, CCSS, CCLS
I am a successful Commercial / Investment Real Estate Broker in Arizona now for 20 years. If you have any questions about Commercial / Investment Properties in Phoenix or Commercial / Investment Properties in Arizona, I will gladly sit down with you and share my expertise and my professional opinion with you. I am also in this to make money therefore it will be a win-win situation for all of us.
Please reply by e-mail walterunger@ccim.net or call me on my cell 520-975-5207
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