In this post, I’d like to show you how to partition the internal rate of return of your real estate investment in Excel. I also throw in a quick equity multiple partition, to highlight how the time value of money affects your returns. I’ve recorded a short video tutorial to illustrate the mechanics of doing this in Excel, and also link you to some great resources for learning the academics behind IRR partitioning.

Real Estate IRR Partitioning

Return from Income + Return from Sale = Total Return

Why Partition the IRR?

First, why is this an important analysis tool? IRR partitioning is a good way to analyze your cash flow on a time value of money basis to determine where the returns, and associated risk for those returns, are coming from.

So for instance, you buy an empty building and get it at a discount because it’s vacant. You should expect a) your returns to be greater than if you bought a fully stabilized building at acquisition because you’re taking the lease-up risk, b) a greater proportion of your returns to come from appreciation since you bought the building at a discount and are expecting a value pop when the building stabilizes, and c) a lesser proportion of your returns to come from income because the building will not be cash flowing early on and you’re more likely to sell it upon stabilization (I’ll discuss hold analysis in a follow-up post). The IRR partitioning technique allows you to confirm that your expectations for a given investment are in fact correct.

Put another way, you want to dissect the IRR to determine if a proposed investment matches your investment criteria.

Video Tutorial – Partitioning the IRR of a Real Estate Investment in Excel

The mechanics of doing this are quite simple. I’ve recorded a video tutorial that walks you through the process in Excel. You can download the Excel workbook used in the video by clicking the link at the end of this post. If you have any questions, please don’t hesitate to ask.

Example Excel File from IRR Partitioning Tutorial
  • Workbook file used in the tutorial on how to partition an IRR in real estate

About the Author: Born and raised in the Northwest United States, Spencer Burton has over 15 years of real estate investment and development experience. In his current position, Spencer assesses new acquisition, development, and debt opportunities for a $45bn real estate fund. He resides in Dallas, TX.