Impact of Costs on Note IRR

[Omri Liba]

Hi,

I use two techniques to financially evaluate notes:

1. Through the RATE() function in Excel, without considering the costs relating to the note
2. Through an Excel sheet that i built that takes into account servicer costs, set-up and closing costs, taxes (17.5% for me as a foreign investor), and other such costs

The issue is, that often method #2 gives an IRR which is 3% lower that method #1.

Just as an example - a note from FCI with ~160 terms left, a rate of 7%, monthly payments of $404.4, and a selling price of ~$30k gives an IRR of ~14.4% in method #1, and ~11.5% in method #2.

My question is - is that normal for the IRR to lose that much due to the costs associated with the investment (servicer, taxes, closing costs,...)?

Thanks!