Real Estate IRR Excel Calculation Question

"Sheu"I've checked my numbers and they look pretty accurate, but am worried that the IRR is inflated due to financing draws and equity reinvestment. Surely there is a way to calculate for the reinvestment of capital to make the IRR more realistic? I just don't want investors or developer looking at the IRR as unusually high and suspicious.

I think the primary thing to remember is that your IRR is your return assuming you reinvest your cash flows at your IRR. So if your project's IRR is 40% then the formula has calculated that your project's annual return is 40% assuming cash flows are reinvested at 40%. Somebody correct me if I'm wrong, but given that assumption, I believe it would be double counting to throw back in to your DCF the cash flows from your reinvested capital; that would, indeed, inflate your IRR. In my view, the IRR's reinvestment assumption is the key weakness of the IRR metric (which is why there is the modified IRR; however, nobody really uses this metric, unfortunately).

The other thing to discuss is how to effectively market a project with a stupidly high return (that some investors might find off-putting because it appears too good to be true). I handle this by taking the excess in my promote and beating that number down (in my view, this is the best way to do it--it's win-win). Or I'll use much more conservative metrics to beat the numbers down to something reasonably marketable. To your point, you want to under-promise and over-deliver.