IRR

Internal rate of return is the annual growth rate that would turn the money you put in into the money you got out, given exactly when each payment happened. It is the one return figure that treats a dollar received in year one as worth more than a dollar received in year five. Take a $1,000 investment that pays $60 a year for five years and then returns $1,300 when the property is sold. The total profit is $600, but calling that a 12% annual return would be wrong, because most of it arrived at the end. The IRR works out to about 10.7% a year. That is the rate at which, if you discounted every future payment back to today, they would add up to exactly $1,000. You will rarely calculate it by hand. Spreadsheets do it with the IRR or XIRR function, and every sponsor's offering document quotes one. What matters is understanding what goes into the number.

A fractional property pays you in two very different ways: a stream of small distributions along the way, and one large payment when the property is sold. Cap rate captures the first and ignores the second. Appreciation captures the second and ignores the first. IRR is the figure that combines both into a single annual rate, which is why sponsors quote it and why you can compare a five-year hold against a ten-year hold with it. It also rewards getting money back early. Two deals with the same total profit can have very different IRRs if one returns capital sooner. That is the correct behaviour, because money you have back can be reinvested, but it also means IRR can look flattering on a short, quick flip and modest on a long, steady hold.

Every IRR you see on a listing is a forecast, and it rests on three assumptions you should find in the offering documents. The exit price. Most of the IRR in a typical fractional deal comes from the sale. A sponsor assuming 4% annual appreciation for seven years is making a claim about the local market, and a one-point change in that assumption can move the IRR by more than a point. The hold period. IRR assumes the property sells on schedule. If a five-year plan becomes an eight-year hold because the market softens, the same total profit produces a noticeably lower IRR. The income along the way. Check whether the projection uses realistic occupancy and rent growth, and whether distributions are net of the platform's fees. A useful habit is to rebuild the IRR with your own more cautious numbers. Lower the exit price, stretch the hold, and see what remains. If the deal still clears your minimum, the sponsor's projection is a bonus rather than a requirement.