Showing posts with label IRR. Show all posts
Showing posts with label IRR. Show all posts

Friday, January 9, 2015

IRR: Its Meaning, Its Uses, Its Benefits, Its Limitations and Capital Accumulation

It is time for this blog to take another step toward legitimacy in the ever growing world of real estate blogs. I am now going to address the frequently used and highly touted real estate metric of Internal Rate of Return. I remember being mesmerized by IRR when I was first learning about commercial real estate metrics. It was introduced to me as the magic number that could explain the true return of a property. I have since learned to respect it as one of the many tools that can be used to understand the return value of an investment property or ABS, while understanding its limitations.


In the interest of brevity, I am going to explain IRR as it pertains to investment property. I will not get into its uses in RMBS and CMBS bonds, as I will save that for a later post. I also will not go into detail on the iterative, successive-approximations technique by which the IRR value is derived. I am on the fence as to whether or not such a discussion would be helpful to this blog. Now that I have told you what I will not do, please allow me to begin my discussion of IRR.