You will regret not knowing the difference between ROl and IRR.
There is a small but a crucial difference between the two.
While ROl just gives you the profits your investment makes, IRR on the other hand takes a more holistic approach and factors into consideration how money’s value changes over time and all the other financial aspects to decide if an investment is good.
Imagine Trump bought an office for 1 Crore and rented it for 60,000 per month. Now to calculate the ROI, we simply divide the annual rent by the total investment amount and in this case we get an ROI of 7.2%.
Now to calculate IRR for the same example, let us factor in all the money received and spent over the next 5 years including escalation, taxes, maintenance, sale price etc.Considering annual escalation of 5% outgoings of Rs 1 lakh/annum and sale price after 5 years to be 1.5 Crs, we get the entire picture of how well the investment will truly do over time.
By calculating all the gains and expenses, we get an IRR of 12%.Simple, isnt it
You can be as precise as you want to by incorporating various other numbers like the interest received on the deposit, amount spent of renovations etc to your IRR calculation.
Comment “Easy” and get a simple template where you just put in the numbers and get to know the IRR for your investment.
(This part on screen while IRR)
Property purchased for : Rs 1 Cr
Annual Rent for 1st year : 7,20,000/-
Net annual Rent after deducting the outflows : 7,20,000 – 1,00,000 = 6,20,000/-
Net 2nd year rent 6,20,000 × 1.05 = 6,51,000/-
Net 3rd year rent 6,51,000 × 1.05 = 6,83,550/-
Net 4th year rent 6,83,550 × 1.05 = 7,17,727/-
Net 5th year rent 7,17,727 × 1.05 = 7,53,613/-
After 5th year, the office is sold for Rs 1.5 Cr
(This part on screen while ROI)
Property purchased for : 1 Cr
Monthly rent : Rs 60,000/-
ROI = (60,000 x 12)/1,00,000 = 7.2%
