What is IRR, ROI, ROR, DCR, DSCR, NOI, XIRR and CAP Rate?
ROI (Return On Investment) or ROR (Rate Of Return)
ROI and ROR are very similar to IRR except that ROI and ROR do not have a timeline built into the equation. ROI or ROR is the percentage increase or decrease in an investment over a set period. It is calculated by taking the difference between the current or expected value and the original value (NET) divided by the original value and multiplied by 100. So, divide the total net by the initial investment. You can then divide that by the number of years or months to get an annual ROI.
IRR (Internal Rate of Return) or XIRR
An IRR is used to calculate a return expressed as a percent. Its more useful when comparing investments with varying timelines and cashflows. It has a complicated formula that’s beyond the scope of this page but one can find many calculators online or use the excel formula “IRR” or “XIRR”. The XIRR is even more flexible with timelines allowing you to enter and exit investments an any point in a year.
DCR or DSCR (Debt Coverage Ratio)
Debt Coverage Ratio (DCR), or DCR, also known as Debt Service Coverage Ratio (DSCR), is a metric that looks at a property’s income compared to its debt obligations. The formula for the debt-service coverage ratio requires net operating income and the total debt servicing for the entity. This is a tool typically used by banks during underwriting to determine if it’s a “bankable” project.
NOI (Net Operating Income) or EBIT (Earnings Before Interest and Tax)
NOI or EBIT is a company’s revenue minus operating expenses, not including taxes and interest payments.
CAP Rate or Capitalization Rate
The CAP rate is to indicate the rate of return that is expected to be generated on a real estate investment property. This measure is computed based on the net income which the property is expected to generate and is calculated by dividing net operating income by property asset value and is expressed as a percentage. It is used to quickly estimate the potential return on an investment. It does not consider leverage, the time value of money, and future cash flows from property improvements, among other factors.