IRR vs. NPV - Which To Use in Real Estate [& Why]

IRR vs. NPV - Which To Use in Real Estate [& Why] // If you take any basic corporate finance class in college or grad school, one of the first concepts you’re going to learn is the Net Present Value (NPV) analysis, and how to use that analysis to make decisions on investment opportunities you might be considering.
However, a very close relative to the NPV calculation is the Internal Rate of Return (IRR), and some of the most frequently asked questions we receive in our courses and Break Into CRE Academy are around which metric to use in an analysis, and why one might be preferable over the other.
The NPV and IRR are both unique in that these are both time value of money functions, where cash flows received earlier on in the analysis period are worth more than those same cash flows received later on in the analysis period.
However, even though these metrics are similar in their mechanics, the end products of these calculations look substantially different from one another, making one of these metrics far more helpful in real estate analysis, especially when presenting to investors.
So to answer a frequently asked question that you might also have, in this video, we'll break down what the IRR and NPV each actually are, how these two metrics play together (from a real estate standpoint), and which metric tends to win out when it comes to real estate financial modeling and valuation.
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Research and articles referenced in this video:
fred.stlouisfed.org/graph/?g=...

[@BreakIntoCRE]

Any other return metrics or calculations you'd like to see covered in more detail on the channel?

[@davidroldan6007]

As always, thank you justin, you are the best. Good vídeos would be payback period, and Networking for entrepreneur. A course fot this last one wont be bad

[@BreakIntoCRE]

@@davidroldan6007 Great feedback, David - thank you!

[@timothybracken1728]

Which is more important for someone trying to get into REPE, the Real Estate Finance and Investments Certification | REFAI or ARGUS certification ?

[@pamelasmith6758]

ROA

[@TFBWatch]

Hey Justin, this reminder was helpful, it's a good addition to your classes. It might be interesting if you cover other metrics like DSCR, Equity Multiple and show their potential limitations.

[@cochemartin]

I see it easier to understand this way-> NPV= price you can pay for a given NOI serie and exit value to obtain an IRR equal to the applied discount rate || IRR= return you obtain at a given price, NOI and exit value.

[@charlesgarrett8564]

Great content! I'm studying for my MBA and its nice to have an explanation that is more straight forward.

[@p.morgan4084]

Thanks for your great explanation, finally some clear explanations with real life examples!

[@danielkunimoto4436]

This was helpful to get my head around (be able to explain it to others) NPV, even though I use IRR calculations everyday.

[@MrSterzzz]

You are the best! Best real estate investing teacher out there🙏🏽

[@framesbydivyaa1890]

I am just started working in IRR thanks for the videos

[@broadly_apparent947]

Good stuff, don't hear NPV covered too often (For better or for worse). Saves a lot of time versus using a goal seek on the initial investment, nice little tip.

[@BreakIntoCRE]

Great point, Jake! Thanks for the feedback!

[@hhhhoooojdjd]

Thank you, for some reason I had issues with these. I get it now 🙂.

[@jordiortega4436]

MASTERCLASS. Thanks, Justin! -Jordi (L.A., CA).

[@EstateDev]

Man I need the basics! From top to bottom as a new investor and someone that just got a major promotion.

[@okthisisthelasttimeipromise]

Great stuff thanks!

[@BreakIntoCRE]

Happy to help, Benjamin!

[@trickinwithwater]

Would be super helpful to include a download for the example spreadsheets used.

[@timothybracken1728]

Which is more important for someone trying to get into REPE, the Real Estate Finance and Investments Certification | REFAI or ARGUS certification ?

[@soulpreppanumbaone]

Nice spread sheet. I nned me one liek that!

[@MrAkshaybajaj]

The same question was asked from me in the interview. 😊

[@BreakIntoCRE]

Ah, I'm too late! I hope the interview went well!

[@thehulk10]

Why do your vidéos seem like they are at à much lower volume? Not à big deal but i always have to turn it up to max to be able to hear you well lol good stuff though, thank you

[@HSKGehtoKarate]

I've seen NPV used in an offering for for the LP minimums commitment should be.

[@BreakIntoCRE]

Interesting - thanks for the feedback, Keith!

[@lowwprofile]

You make it too easy to understand!

[@mag5993]

Hi Justin, if you are not given a discount rate but get a positive IRR - how would you calculate the discount rate and is it even necessary to compare to the discount rate if the IRR is positive?

[@uno1industries]

Yes, it’s necessary because the IRR must be greater than the discount rate. The discount rate is the MINIMUM return a property must generate. The IRR can be positive but still not value additive if it’s below the minimum return. General rule of thumb: NPV > 0 = good; NPV < 0 = bad IRR > Discount rate = good IRR < Discount rate = bad

[@Jdog233]

NPV is great for an air check

[@j.davidborrero2171]

If your NPV = $102K, and your initial investment is $10,000,000, why would you want to invest in the deal? $10million today > $102K today. Shouldn’t you just keep your $10 million and not invest?

[@OscarTorresWork]

Any chance on making videos if Democrats pass a bill to stop investing with Selfdirected IRA and just allow IRA how would it affect syndication.

[@BreakIntoCRE]

Great feedback, Oscar - definitely something to consider for future video topics. Thank you for the suggestion!

[@OscarTorresWork]

@@BreakIntoCRE Biden's done alot to damage a person from ever leaving the rat race. Real Estate to me is the last or close to last asset class. I'm not interested in stocks, etfs, or any poison the gov't creates to penalize you for making a profit.

[@MisterKelisi]

Why did he use "XNPV" and not "NPV"?

[@cuonglv89]

XNPV will return the annual NPV while NPV will assume every period is annual, which may not be correct