Welcome to part 3 in our 3-part series of how to calculate return
on real estate investment. What I'm going to share with you today is going to make real
estate the best investment you can invest in compared to anything else.
Hey there, my name is Mike Fritz. I'm the founder of Titanium Capital Investments
and the multi-family CEO system. My greatest passion is helping investors just like you
create financial freedom in multi-family real estate and in this 3rd part to our 3-part
series, I'm going to walk you through what is an internal rate of return. It's the one piece of
every equation that makes real estate the best investment you can ever make and make sure you
stick around to the end because I want to give you a free gift that'll exponentially grow your
portfolio in about half the time. Maybe you've heard the term IRR. IRR stands for internal rate of
return and it takes into account everything that you make on a real estate deal. Now, in cash on cash
return that calculates how much money you make while you own the property, but if you exit that
property, you sell that property or you refinance, now we slide into the category of an internal
rate of return, meaning how much we've made on the entire transaction of the deal including what we
made while we owned it and what we made when we sell it. Cash on cash return is your net return
divided by how much cash you needed to put into the deal and you have your cash on cash return,
that's a really important number to know when you're figuring out your internal rate of return.
In fact, you have to know it. You have to know what percentage you have earned throughout the deal.
So, your net return, this is how much money you make while you own the deal, how much money you
make after income minus expenses minus your debt payment. So, you take your income, minus out your
expenses, minus out your mortgage and interest payment and you have your net return. This is how
much money we make after we pay all of our bills on a property, so we have our net return, then you
divide that by how much money you actually have into the deal. When you divide that about how
much money you have into the deal, you get your cash on cash return. And we also want to remember
that your net return, how much money you make every month, is a variable that changes which will
increase your cash on cash return as long as that number goes up. If this number goes down, your cash
on cash return goes down, but your cash needed is a constant. Meaning your down payment, your appraisal,
your inspection, your closing costs, everything it needed to get the deal was a one-time investment
unless later on in the deal, you need to do a capital call and raise more money, this number
is really a constant, doesn't change. So, you have a variable over here and a constant over here
and our goal is to keep this the same and keep this going up and that will continue to increase
our cash on cash return. You have to know your cash on cash return if you're going to know your
internal rate of return. Now, your internal rate of return is a little more tricky and that's why
I want to shoot this to really help you understand this because the more you understand this, the more
you can talk to your investors and the more you can know as an investor so you understand
how am I really making money in my deal because an investor might see their cash on cash return
and it's only 6% year 1 and they might look at that and say, "Listen, 6%'s
not really that big of a return. I'm not making that much on my money, I might go someplace else,"
but internal rate of return is what can pull them back into the discussion and really make
them see real estate as the best and only option to invest in. So, understanding this
really separates you with your investors and helps you speak educatedly about how they're really
going to make money back on the money that they've given to you. So, let's dive into what internal rate
of return actually is. So, the first thing you need to do is take your cash on cash return.
This is how much money you've made while you owned the property, add that to the amount of years you
owned the property. So, if you made 5,000 year 1 and then you made 6,000 year
2 and 7,000 year 3, you're going to add all of those years up so you have 3 years
and here's what I've made while I owned the deal and that's what we call a TR, a total return, how
much money you owned while you had the property. So, you take your cash on cash return and then you add
up all the years you've owned the property on how much money you made in those years and then you
have this total return number. So, year 1 you make 6,000 then year 2, you make 7,000
that's 13,000, year 3 you make 8,000. Now, we have 21,000 so we've
made 21,000 and we bring that down to a total return. I'm going to walk you through an
example in just a moment and help you see how this really plays out. So, now you have your TR or your
total return then you add that to your capital gains. Now, your capital gains is once you sell
the property, how much money did you make from the sale of that property. So, you take how much money
you made while you owned the deal, you add that to how much money you made when you sold the deal
and then you divide that by years owned and then you have your IRR or your internal rate of return.
Internal rate of return, I want to make sure you understand how this plays out in relationship to
cash on cash because here's the thing, if investors are only looking at this number, they're going to
not be very impressed with real estate. You want them to see the whole picture because when they
see the whole picture, it's gonna turn their 5 or 6 or 7 percent when they start with the
deal to 18, 20, 30% sometimes on a deal and that's where we want to help them see they're not going
to make that anywhere else especially in the stock market, but if they're going only on what they're
going to make cash on cash year 1, maybe 2 and 3, then it's really not going to be that much money.
But when you sell the property and exit, you're going to see giant returns for your investors and
they're going to be ecstatic. Now, as a side note, that is only true if you buy in areas that have
markets that are going northeast. You have to make sure you're investing in markets
they can appreciate so when you sell them, you can sell them for more than you buy them for
and really see a strong internal rate of return. If you want more content on how to continue
to invest in deals, raise money, find properties, choose markets, make sure you subscribe to our
channel and join our family of investors that are creating financial freedom through multi-family
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Now, I want to walk you through an example of a recent property we just exited and sold and what
kind of returns people experienced. So, the first thing, our investors made on average, they made
about $4,000 per year. Made about $4,000 per year. Now, that's only 3 to 4
hundred dollars a month range, not a lot of money but our investors in this deal put about 50
thousand into the deal, it was a smaller deal and the deal we bought for 780k. So, we bought for 780k,
most investors threw about 50,000 into the deal and they were making 4,000 per year. And if you're
doing your math correctly, that's about an 8% return. While that might be a strong return in real estate
to start, not a huge huge return. So, we owned the property for 3 years, they made 4,000
dollars and we decided not to pay more money year after year after year and just put that money back
into the property. So, we continue to give our investors about $4,000 each year
that we owned the property. So, our investors ended up making about $12,000 the entire
time we owned the property. So, again $4,000 is what they made on their cash on cash
plus remember, I said we owned it 3 years which is $12,000
so now we have a $12,000. So, our total return here is 12k, that's our TR
that's our total return. So, then we take our $12,000 down here and we plus the capital
gains. When we sold the property, each investor made about $21,000 on the sale of that property for
their perspective percentage of ownership. So, each investor made about 21k on the deal. So, they made
12,000 while we owned it, that's the total return then as we sold it, their capital gains was 21,000
and then we owned it 3 years. So, we take 12,000 times 21,000. So, we have 33
thousand divided by 3, so we have $11,000 they made on average per year,
right? So, we take $33,000 divided by 3 is $11,000.
Now, what do we do with that 11 grand? So, here's what we do. We take 11 and we divide it by what?
How much money they have into the deal. So, if they made 11,000 a year,
they put 50k into the deal, each one of our investors experienced a 22 percent
IRR, internal rate of return. So, each of our investors got 22% per year on their money,
beat that stock market. So, here's the idea is the idea is that a lot of people like, "I don't really
want to start off making 6 or 7 or 8 percent," but that jumps after we sell it to 22%.
It almost triples in the amount of return they get. So, if you're only looking at cash on cash return,
man that's an anemic way to look at a real estate deal because your IRR is the divine number. This is
the number that changes everything because it's going to make every investor want to be in your
deal and it's going to really tell you which deals you should go forward with and which ones you
should avoid. I also want to give you a free gift today. I put together a free 60-minute multi-family
master class that helps people just like you get into multi-family real estate in 71 days or less,
even if they don't have any money. So, what you want to do is in the description, click the link
free multifamilymasterclass.com, you're going to be taken to a 60-minute training that'll really
help you spike your real estate portfolio and start putting some of this stuff into practice.