SS163: Levered vs Unlevered IRR

SS163 Levered vs Unlevered IRR

It is common for real estate investors to come upon the terms Levered IRR and Unlevered IRR. In this episode, Charles discusses the difference between them and why it is important to understand both calculations.

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Talking Points:

  • In episodes SS105 and SS162, I broke down what IRR is and how IRR differs from other financial metrics, but to summarize, the Internal Rate of Return or IRR accounts for the time value of money. A dollar today is worth more than a dollar in the future, and the longer it takes to realize that future dollar, the less valuable it becomes.
    • The IRR expresses the compounded annual percentage rate every dollar earns while invested.
    • Most investors will utilize the IRR to compare private equity offerings with other investments, like stocks, mutual funds, etc.
    • The main point with the IRR is that it is time-dependent. You invest $100,000 and receive back $150,000 in 2 years versus $150,000 in 4 years; the 2-year deal will have a higher IRR.
  • What are the differences between levered IRR and unlevered IRR?
    • Levered IRR is a financial metric that considers debt associated with the investment. It expresses the expected rate of return of an investment after considering any debt used to finance the investment.
    • Unlevered IRR only considers the investment without including any debt. It only represents the cash flow generated by the investment itself.
  • When comparing levered IRR and unlevered IRR, investors should weigh the pros and cons of each approach.
    • Levered IRR looks great when the cost of borrowing is less than the investment’s potential return; however, leveraging an investment increases its risk.
    • Unlevered IRR is usually a more conservative approach that reduces the investment’s risk but will most likely lower the investment’s overall returns.
  • When you review different investment memorandums, most deal operators trying to raise capital for the deal will list the levered IRR metric since it usually results in a higher yield that looks better to potential investors. If you see a commercial real estate deal with an expected IRR of 12%-20%, that is most likely the levered IRR return, while the unlevered IRR might be half that. If you are unsure, make sure to ask the sponsor.

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo, and today we’re going to be discussing Levered vs Unlevered IRR .

Charles:
Have you always wanted to invest in real estate, but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties and great locations that provide us with consistent passive income. While we wait for appreciation in the future and take advantage of tax laws while we’re waiting and unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out to investwithharborside.com. If you like the idea of investing real estate, if you like the idea of passive income partner with us at investwithharborside.com, that’s investwithharborside.com.

Charles:
In episodes, SS 105 and SS 162, I broke down what IRR is and how IRR differs from other financial metrics. But to summarize the internal rate of return or IRR accounts for the time value of money, a dollar today is worth more than a dollar in the future and the longer it takes to realize that future dollar the less valuable it becomes.

Charles:
The IRR expresses the compounded annual percentage rate. Every dollar earns while invested. Most investors will utilize the IRR to compare private equity offerings with other investments like stocks, mutual funds, et cetera. The main point with IRR is that it is time dependent. You invest a hundred thousand dollars and receive back $150,000 in two years versus $150,000 in four years. The two year deal will have a higher IRR. What are the differences between levered IRR and unlevered IRRA? Levered IRR is a financial metric that considers debt associated with the investment. It expresses the expected rate of return of an investment after considering any debt used to finance the investment. Unlevered IRR only considers the investment without including any debt. It only represents the cash flow generated by the investment itself. Now, when comparing IRR and unlevered, IRR, investors should weigh the pros and cons of each approach.

Charles:
Levered IRR looks great when the cost of borrowing is less than the investment’s potential return. However, leveraging an investment increases its risk. Unlevered IRR is usually a more conservative approach that reduces the investment’s risk, but will most likely lower the investments overall returns when you review different investment memorandums. Most deal operators trying to raise capital for the deal will list the levered IRR metric since it’s usually results in a higher yield that looks better to potential investors. If you see a commercial real estate deal with an expected IRR of 12% to 20%, that is most likely the levered IRR return while the unlevered IRR might be half that. If you’re unsure, make sure to ask the sponsor. I hope you enjoyed. Please remember to rate, review, subscribe, submit comments and potential show topics@globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs@syndicationsuperstars.com. That is syndication superstars.com. Look forward to two more episodes next week. See you then.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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