Why irr is bad

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Limitations of Internal Rate of Return as a Predictive Metric Despite its name, calculating a projected future IRR actually requires one to take into account a number of external factors, which are very difficult to predict. Real-world example: how cap rate can impact IRR Imagine a hypothetical equity investment in an apartment building.

Scenario 1 - Cap Rate of 5. Conclusion As you can see, using IRR to evaluate the potential profitability of an investment generally involves a lot more assumptions than may be immediately apparent. Recommended articles How to Invest in Real Estate The Basics Real estate investing may be one of the best investments available, and for good reason.

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To read this article, you need to sign in. You are reading your last free article for this month. Subscribe for unlimited access. Create an account to read 2 more. Financial analysis. A Refresher on Internal Rate of Return. Understand this commonly used way to calculate ROI.