Advantage Software LLC  What is the Internal Rate of Return and How is it Used?
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    Internal Rate of Return - IRR 
 
     
  The Internal Rate of Return or IRR calculation put simply measures the average annual yield on an investment.  For an income producing property, the IRR calculation uses the initial amount invested in the property, a series of projected cash flows which are usually after-taxes, and a projected After-Tax Sales Proceeds amount in a given year. 

Lets look at an example.  If we were calculating the internal rate of return for an income producing property 5 years in the future, we would use the Initial Investment amount or the amount of money put down on the property, the projected After-Tax Cash Flows for each of the five future years and the anticipated After-Tax Sales Proceeds in year five, the final year, to calculate an average annual return on our initial investment amount over the five year period.  The On Target real estate model calculates an After-Tax IRR in years 1 through 10 using this method. 

 
     
 
     
 

You should be aware of the following when using the IRR to measure the return on an investment.  If in year 5, you have a return of 20%, the internal rate of return calculation assumes that you made 20% on your cash flows for each of the five years.  You may or may not be able to make 20% on your cash flows.  The calculation can therefore sometimes greatly exaggerate your average return on an investment.

The On Target real estate model also calculates a MIRR, or modified internal rate of return.  When calculating the MIRR for Future Wealth with the On Target real estate model, we allow you to enter what rate of return you think you will make on your cash flows.  The MIRR for Future Wealth can therefore provide a more accurate return on cash flows for each year since you determined the interest rate at which the cash flows get ran forward at.

The On Target 4.01 real estate analysis software calculates both an internal rate of return and a modified internal rate of return.  The internal rate of return is calculated for each year over a ten year period and is based on investor growth rate assumptions for income, expenses and appreciation.  These values and other important real estate investment ratios are summarized on the On Target Ratio Analysis report.  You can purchase a copy of the On Target software for only $99.95 by clicking on   Purchase Software   For a  detailed description of On Target features, go to  Software Features   The On Target real estate software  includes a 30 day money back guarantee and free support.

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