AAR vs IRR - What is your definition?

[Kyle Mitchell]

Hi everyone,

When talking with other investors there seems to be a lot of confusion between the definitions of AAR vs IRR. Can everyone please share their best definitions of the two and which metric you share with your investors?

Thanks!

Kyle

[Michael Le]

I share both. But personally I prefer IRR because, as I'm sure you know, IRR takes into account the time value of money. And if someone doesn't quite understand that, here is my explanation for that.

Let's say that you invest $1000 in my property. 

Scenario 1 - If at the end of each year I give you $100 then that's a 10% COC return.

Scenario 2 - If I don't give you any money at all for 5 years and then at the end gave you $500, that's still a 10% return. 

Scenario 3 - If at the time you initially invested I had immediately turned around and handed you back $500 and not given you anything for the next 5 years, at that 5 year mark it still would be a 10% return.

Obviously there is a difference in those 3 above scenarios, despite the fact that the COC is the same, and that difference is when you get the money.