Kim Lisa TaylorSecurities Attorney, Founder, Syndication Attorneys, PLLC · Corporate Securities Attorney, 2x Best-Selling Author, Nationwide Speaker | Private Placement

Decoding IRR for Investors and Syndicators

22 Jul 2024 · 1 min

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In this segment, the presenter highlights the widespread confusion surrounding Internal Rate of Return (IRR) among both investors and syndicators, noting that this lack of understanding often leads to its underuse. He advises that if you are comfortable with IRR, you may employ it, but if not—or if you doubt your investors' grasp of it—switch to the average annual return metric, which is easier to explain. He then outlines a straightforward calculation: total cash flow from a project (rental income plus equity from sale) divided by the number of years the project was held, and then divided by the original investment amount, yielding an annualized return figure that can be presented to investors.

Chapters

A lot of investors don't understand IRR. A lot of syndicators don't understand IRR, so they don't use it. If you do understand it, feel free to use it. If you, you know, you don't, or you don't think your investors will, then use average annual return because you can explain it right. You can explain it the way I did. It's all the cash flow generated from the project, from income, from rental income plus equity on sale. Add it all together, divide it by the years we've owned the project, divide that by the money that we invested originally, gives the annualized return, and that's what you're selling to your investors. Nobody