How is IRR used?

Internal Rate of Return (IRR) is one of the key measures used by financial analysts and businesses to determine where to invest their money – should I buy this machinery and earn money from it over the next four years or should I open a new store with the expected revenue gains over time?

For investors with a leaning towards property, the decision of where to invest your funds is likely to be in the following areas:

• Residential property

• Commercial property

• Property development

• Property finance/lending

The investment choice is then compared with what it costs to get the money (loan rate, offset saving account rate) or how much return you can get risk free (term deposit, 10-year bond). This Hurdle Rate, as it is known, is to make sure it is worth investing your money at all. 

What Hurdle Rate should you use?

If your funds are in term deposits, your Hurdle Rate is less than 1.5% as that is what you can achieve with those funds currently. Risk naturally places a part, as you wouldn’t invest in a higher risk activity that provides a 2% return when you have a risk-free return at 1.5%.

If you have equity in your properties, the cost of using that equity for another investment is the loan’s interest rate.  This is your Hurdle Rate as any investment must return more than your interest rate to even be considered.

At Bluebirders, our Hurdle Rate is an IRR of 8%. You may be happy having this level of success as it doubles your money every 9 years.  Our reason for a Hurdle Rate of 8% IRR is that we can achieve that result without having to invest our time and effort into creating and running the Bluebirders business. The median IRR for Bluebirders over the decade of historical data is 22%[1] and those results make it worth our while to invest our own funds and allow some others to join us.

Which investment do you then choose?

Once you have determined the IRR for your different investment options and removed those that don’t clear your Hurdle Rate, you may have a shortlist to choose from. Your choice is then based on your understanding of the investment and how risk is mitigated, as well as the important factor of whether you can sleep well while your money is working for you in your chosen investment.

[1] The Internal Rate of Return (IRR) performance is NET of all fees. Performance figures displayed are past performance. Investors should be aware that past performance is not indicative of future performance. The results achieved by investors was actually higher than stated above. The addition of the Bluebirders governance model has reduced the IRR to produce the result stated above. All amounts are in US dollars.