Evaluating an Investment – Internal Rate of Return IRR

As you are evaluating multi-family projects to potentially invest in with different sponsors, there are certain metrics and terminology that you want to understand. In this video, I’ll talk about internal rate of return or IRR. You might see this on various investment summaries. So IRRs are a great metric because it takes into account the time value of money. If I tell you I’m going to double your money, sounds pretty good, right? Double my money. Well, if I tell you it’s going to take 15 years to do that, that gets a whole lot less attractive, so just doubling your money is not the point. Doubling your money quickly is the point. We typically underwrite doubling your money or projecting that in about a five year hold, right? That’s kind of our underwriting criteria for my company. You may see that happen much shorter. If you see that happen in a shorter time period, your IRR’s going to be very high. We target an IRR in the mid-teens, right? 15%, give or take, and it’s an important metric because it accounts for the time value of money, not just your return. So the actual math complication, if you look it up in an Excel spreadsheet, is relatively complicated, but I don’t think it’s necessary to understand every bit of it on the back end, although you’re more than welcome to study it in Excel or online. But it’s just one more thing as an educated investor to be aware of as you’re evaluating deals. What is the target IRR? And typically on commercial multi-family deals, you’re seeing an IRR from 12 to 18%, somewhere in that range, and that’s typically what we underwrite to as well.