Internal Rate of Return Calculator
A helpful tool to calculate an asset’s internal rate of return (IRR), which measures the annual rate of growth expected to be generated by an investment.
Internal Rate of Return (IRR)
In multifamily investment, the internal rate of return, or IRR, is an important metric that represents the annual rate of growth expected to be generated by an investment property. IRR — generally expressed as a percentage — is used by investors to estimate the profitability of potential investments. More specifically, internal rate of return is a measure of the percentage rate earned on each dollar invested, for each period it is invested.
How to Calculate IRR
In a discounted cash flow analysis, the internal rate of return is the discount rate that makes the net present value (NPV) of an investment equal to zero — accounting for the time value of money. That said, IRR is calculated through an iterative process that utilizes a standard formula. The IRR formula requires that a few metrics must first be determined, including the net cash inflow for a given time period (typically one year) as well as the total initial investment costs.
Modified Internal Rate of Return (MIRR)
A variation of the IRR measurement, Modified internal rate of return — or MIRR — takes into account any positive cash flow that is received and then reinvested into a different asset. MIRR calculations utilize the investor’s estimated rate of return on the reinvested funds in order to determine the “reinvestment rate”. This rate is then used to calculate a “modified” IRR which more accurately represents the investor’s overall return.
Return on Investment (ROI)
Due to their similarities regarding investor returns, IRR is often confused with return on investment. Unlike IRR, however, ROI is representative of the percentage increase or decrease of an investment throughout its lifespan. As a reminder, IRR is only a measurement of an investment’s annual growth rate. Additionally, the time value of money is absent from ROI calculations, unlike with the determination of IRR.