2009-2014 NSpire Returns (IRR=34%)

Written February 2nd, 2015 by


What return are you getting from your investments?  Though not simple to answer, it is important to understand, and may surprise you. Your "returns" may be a combination of items such as dividends/interest, distributions, refinance proceeds, principal paydown, tax advantages, and built in gains on the value of the underlying investment.  These are not simple to calculate, nor easy to work down to a single number.  But, once you know what your various investments are returning, it can help you determine whether your investments are meeting your needs and where you may want to shift your investments in the future!

34% NSpire Portfolio Return

NSpire recently analyzed the returns across our entire portfolio of properties, and we were pleasantly surprised to find that our investors have been earning a 34% average annual return since our inception in 2009.  We'll show you how we calculated this for our portfolio below, as an example of the calculations you may want to make for your portfolio.

It is important to point out that the capital gain returns are not realized until either a partial cash-out refinance, or until the property is sold.

Calculate Return for your Investments

The easiest way to calculate your average annual return is by using IRR (Internal Rate of Return) on the annual cash flows for the investment.  We recently did a blog on IRR, but basically here is how it works:

  1. Calculate annual cash flows:
    • The investment you make is a negative number in the year you invest it
    • Each dollar that you get out in future years is a positive number
    • The total returned when you sell is a positive number.
    • If you still own the investment, estimate the value of the investment if sold today, and plug that in this year (the final year).
  2. Plug the annual cash flows into Excel or a financial calculator
    • Use the "IRR" formula in Excel
    • Or use the "IRR" formula in a financial calculator (a bit more complicated)

The resulting "IRR" is the average annual compounded return on  your investment.  It is effectively your average annual return.  The spreadsheet we used below is available here, if you would like to try this with your own portfolio.

NSpire Calculation

We calculated our annual return using the method above:

  1. We input the "Equity Investment" for each property raised from investors (negative number)
  2. We input the "Annual Cash Flow (Operations and Refinance)" each year of ownership (positive number)
  3. We estimated the value of the property if sold today, along with the investor returns
    • Be realistic in your assumptions on market value
    • For our properties, we use conservative cap-rates, put cap-ex reserves above NOI (to be conservative) and include 5% sales costs.

This resulted in the following table:

4Q14 NSpire IRR

 

Update our Excel for your Portfolio

You can update the above Excel to calculate the returns for your portfolio:

  1. For each property line, replace it with your investment
  2. Under "Equity Investment", put your purchase price for the investment (negative number)
  3. Under "Annual Cash Flow", put any dividend, interest, or any other money received each year
  4. Under "Estimated Returns if Sold", put your estimated return if you sold the investment today.

The "IRR" number at the bottom is calculated for the entire portfolio.  You can only input a single investment to see the IRR for it, or enter your entire portfolio to see the IRR for everything.  Make sure you go back far enough in years to get your initial investment (negative number) for any investment income you include.

Summary

Performing an IRR analysis on the cash flows from your investment portfolio is a very powerful method to understand the returns you are receiving.  Though it can be a bit tedious to do for every investment you own (e.g. stocks, bonds), it is manageable for bigger investments (such as multifamily properties or other very large investments.)  This can be a powerful tool to measure the relative performance of your investments and to make decisions about where to invest in the future.

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