Why You Can’t Always Trust IRR in a Real Estate Investment
Learn why you shouldn’t rely solely on Internal Rate of Return (IRR) to evaluate a commercial real estate investment opportunity and why it’s important to use IRR in conjunction with equity multiple. IRR is one of the most common metrics real estate managers use to describe their return on investment, it represents the compounded annual percentage rate every dollar earns during the period of time it is invested.
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The problem with using IRR as the primary indicator for a deal’s success is that it can be artificially inflated by minimizing the amount of time your capital is invested. So while a fund manager might report a 17% IRR on a million dollar investment, you cannot calculate your total return until you know the multiple on your invested capital.