In the commercial real estate investment world, one of the most important values to compare potential investment properties is the internal rate of return, or IRR. One way to think of this value is a display of the growth rate the project is expected to generate. It’s a number that, roughly speaking, describes profit after cost of capital is paid for. Real estate investment firms put so much stock into IRR that they commonly use it as a major deciding factor to greenlight a project or not. If a project’s IRR doesn’t meet or exceed the firm’s minimum acceptable return, or required rate of return (RRR), chances are that project is a no-go for the firm.
There is no single best method or toolset to calculate CRE finance variables, and what follows here is merely an illustration of the concept using Excel. Last month, Spencer Burton, a Milwaukee-based associate with Northwestern Mutual Real Estate Investments put together a very nice bit of screencast video showing veryc clearly how he assembles a IRR model in Excel, including hold times, cash flows, NOI and other elements that go into the model.
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