I was just "mucking around" with the Internal Rate of Return calculation with the contributions we have been making to our daughter's managed fund.
I just thought about how the IRR calculation would apply to a property (as much for a mental challenge as anything). My understanding of the computation is that cash inflows into the portfolio are +ve, and cash outflows from the portfolio are -ve.
From a property perspective, it seems easier to refer to "payments out of my wallet" (+ve) and "payments into my wallet" (-ve).
So, that means the initial purchase price is +ve, interest payments are +ve, all ongoing expenses are +ve
The only payments that are obviously -ve are rental income.
Then I come to the grey areas. If anyone cares to answer these I'd appreciate it:
1. How are the tax-related figures factored into the IRR? For example, depreciation, tax refunds, capital gains etc.
2. It's quite possible to compute a notional IRR and also a real IRR, depending on whether you really sell or not. For example, if you intend holding a property for 25 years, and you want to calculate the IRR after 5 years, do you compute a notional IRR (ie. you don't factor in potential selling costs like sales commision, advertising, conveyancing, capital gains tax etc) or do you?
Thanks
I just thought about how the IRR calculation would apply to a property (as much for a mental challenge as anything). My understanding of the computation is that cash inflows into the portfolio are +ve, and cash outflows from the portfolio are -ve.
From a property perspective, it seems easier to refer to "payments out of my wallet" (+ve) and "payments into my wallet" (-ve).
So, that means the initial purchase price is +ve, interest payments are +ve, all ongoing expenses are +ve
The only payments that are obviously -ve are rental income.
Then I come to the grey areas. If anyone cares to answer these I'd appreciate it:
1. How are the tax-related figures factored into the IRR? For example, depreciation, tax refunds, capital gains etc.
2. It's quite possible to compute a notional IRR and also a real IRR, depending on whether you really sell or not. For example, if you intend holding a property for 25 years, and you want to calculate the IRR after 5 years, do you compute a notional IRR (ie. you don't factor in potential selling costs like sales commision, advertising, conveyancing, capital gains tax etc) or do you?
Thanks