3 Things: Three Ways To Measure Your Real Estate Investment Return
1. Internal Rate of Return (IRR) This Internal Rate of Return uses the time value of money as a factor in determining the quality of the investment. Larger returns early on in the investment increases the IRR. A deal with a 15% IRR will approximately double your money in 5 years. 2. Average Annual Return (AAR) The AAR tells you what return you are getting on average over the hold period. This is what new real estate investors can use to compare their investment to what they are used to getting in the stock market. Recently our average annual returns have been in the 15-20% range. The AAR factors in the disposition of the asset through sale or refinance. 3. Cash on Cash (CoC) Some investors value the amount of cash they will receive. If you invest $100k in a deal and the asset cash flows $7,000 per year you are receiving a 7% cash on cash return.