1. What is IRR for Rental Property?

The Internal Rate of Return (IRR) is a metric used to estimate the profitability of potential rental property investments. It's the discount rate that makes the net present value (NPV) of all cash flows equal to zero.

2. How Does the Calculator Work?

The calculator uses the IRR equation:

Where:

• \( CashFlow_t \) — Net cash flow at time period t
• \( r \) — Internal rate of return
• \( t \) — Time period (usually years)
• \( n \) — Total number of periods

Explanation: The equation finds the discount rate where the sum of all discounted cash flows equals the initial investment.

3. Importance of IRR Calculation

Details: IRR helps investors compare different rental property investments and assess their potential returns, accounting for the time value of money.

4. Using the Calculator

Tips: Enter initial investment (negative value), investment period in years, annual cash flows (positive values), and optional terminal value (sale price at end).

5. Frequently Asked Questions (FAQ)

Q1: What is a good IRR for rental property?
A: Generally, 15-20%+ is excellent, 10-15% is good, and below 8% may not justify the risk.

Q2: How does IRR differ from ROI?
A: IRR accounts for the time value of money while simple ROI doesn't consider when cash flows occur.

Q3: What are limitations of IRR?
A: It assumes cash flows are reinvested at the IRR rate and can be misleading with unconventional cash flow patterns.

Q4: Should I include mortgage payments?
A: Yes, include all cash inflows and outflows - rent income minus operating expenses and debt service.

Q5: How accurate is this calculator?
A: It provides a good estimate but professional analysis may be needed for complex investments.