Internal rate of return (IRR) is generally more popular than other rates of return to a real estate investor because it calculates for time value of money and provides a linkage between present value (PV) and future (FV) of any benefit stream. In other words, it allows the investor to take into account both the timing and the scale of cash flows generated by the income-producing investment property.
The principal assumption, of course, is that a dollar in hand today is preferable to a dollar at the end of the year or ten years from now. IRR measures future cash flows with a particular discount rate (an investors desired rate of return) and determines what that rental income stream is worth today.
Next time we’ll discuss the internal rate of return calculation. Stay tuned.
