What is internal rate of return? What does the calculation include, and what period of time does it cover? That’s the first question I’m answering on today’s Q&A episode!
Today I’m answering three great listener questions about IRR, buying real estate when prices are high, and the state of the market at the end of 2022. Press play to hear my answers to your questions on this episode of Investing in Real Estate!
On this episode you’ll learn:
- What internal rate of return is.
- If now is a good time to buy real estate.
- The difference between a buyer’s market and a seller’s market.
- And more!
What Internal Rate of Return Is
IRR is is the annual rate of growth expected on an investment.
There are three streams of income to review in an IRR:
- Cash flow: What is your annual net cash flow return on this investment? This is how to determine how much cash ends up in your account at the end of the year.
- Principal reduction: In most cases, you would use financing for your investment, and each month you need to make a mortgage payment. However, you are receiving rent each month from your tenant, this money is actually paying down your mortgage.
- Appreciation: Every year, you should expect your property to increase in value.
For more on IRR, be sure to check out my full video here.
If Now Is a Good Time to Buy Real Estate
In my personal opinion, it’s always a good time to buy real estate. Whether we’re in a strong economy or not, the benefits of real estate are there. Sure, you might be paying a bit more for real estate (and in interest) right now. But as long as the numbers make sense on your investment, real estate is a great hedge against inflation with incredible tax benefits.
The Difference Between a Buyer’s Market and a Seller’s Market
The best way to understand the difference between a buyer’s market and a seller’s market is to look at supply and demand. If supply exceeds demand, that’s a buyer’s market. On the other hand, if there’s more demand, it’s a seller’s market. Right now, there’s still an incredible demand for properties. Even if demand isn’t as high as it was earlier this year, I would say we’re still in a seller’s market. This can also vary by individual market, but on the whole, we are in a seller’s market.
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