I was standing in the Skylounche of DoubleTree, Hilton in Amsterdam. This building has been sold twice over the last 2 years. And I was thinking to myself; why shouldn’t I buy it?
When working out the Investment Proposal (IP), I noticed the main financial measurement in the IP is the Internal Rate of Return (IRR). So I started thinking: what is exactly this IRR and how can I tune it?
When I zoom in the IRR, I realized that the timing of cashflows is crucial. For example my rental income: the moment it hits my bank account matters big time.
In the negotiations with Hilton, I can steer having a Monthly or a Quarterly rent. I know that, since timing is important, the monthly rent will give me a higher IRR. So in the negotiations, I can give them a discount on the rent, asking back a monthly rent, and still end up with a higher IRR.
Receiving my money earlier means a higher return. And the IRR is how you measure that timing effect precisely.