One of the more common ways to analyze the profitability of an investment is with a metric known as IRR. Internal Rate of Return is a useful forecasting tool and a means to guide courses of action. It’s also a metric that addy features prominently in just about every available property.
We’ll take a look at this important figure and how it’s applied to investments in general and addy specifically so that you can make the most informed decision possible.
What is IRR?
Simply, IRR, or internal rate of return, is the annual rate of growth an investment is expected to generate. Similar to return on investment, IRR is used to evaluate a potential investment. It can also help compare varying types of investments to make the decision clearer. In general, a higher IRR translates to a better investment.
Unlike ROI however, IRR isn’t as simple a calculation. While ROI looks at your initial investment and what you earned, expressed as percentage, IRR takes into account a few different figures. This includes net cash inflow, initial investment costs and time. If a ten-year deal and a two-year deal pay out identical amounts, the two-year deal will have a higher IRR since it’s quicker.
Most importantly, IRR is predicated on Net Present Value (NPV), which represents all inflows of cash minus any cash outflows.
How to use IRR
IRR can be used in a lot of different situations by both corporations and individuals alike. It can be used with company operations or stock buyback programs for example. Concerning individuals, IRR may prove useful in comparing insurance policies or investing in real estate. In general, IRR is used when it comes to large projects or investments, particularly those associated with real estate.
ROI versus IRR
These two metrics can get a little confusing, but here’s how they work together in simplified terms. Return on investment is the total growth of an investment. Internal rate of return, however, is the annual growth of an investment. That means if an investment takes place for exactly one year, the two numbers should be the same!
ROI is useful when comparing potential opportunities, but as it does not consider time, the calculation may not be the most useful for investments of different terms.
However, just like using ROI exclusively is limiting, only looking at the IRR of an investment may prove short-sighted as well. It’s important to consider the length of an investment, especially when comparing two projects that have a similar IRR.
addy and IRR
IRR is one of two key metrics addy presents with most investments opportunities, the other being ROI. Let’s look at two examples. Firstly, our smart hotel addy in Montreal is only a two-year term, with an ROI of 38.96% and IRR of 17.88%.
Our second drop for our Maple View Heights purpose-built rental in Mission, BC, meanwhile estimates an 203.38% ROI and 9.92% IRR across a 12-year term.
While the Mission addy has a significantly higher ROI than the Montreal addy, the IRR is about half. That’s because the first property is a term of 2 years, while the latter is 12. Each number on its own doesn’t necessarily paint the fullest picture.
Where’s the IRR?
We mentioned that most of the addy investments feature an IRR. However, on our affordable housing development opportunity in Hamilton, there is neither an IRR or an ROI metric featured. That’s because with this property, the General Partner is not expected to sell it, so a term can’t be set. Distributions are expected to start in year four and continue annually in perpetuity.
Invest with addy
Only addy members can invest in properties and read through the detailed Offering Memorandum that includes these key metrics and much more useful information. You need to be a member to invest, but you don’t need to keep your membership to continue receiving distributions, so you don’t need to worry about any lengthy terms – or that are expected to run in perpetuity.
With addy, you’ve a chance to take part in fractional real estate that is accessible and affordable. Crowdfunding lowers the barriers to real estate investment and gets you a chance to earn some passive income.