IRR accounts for the time value of money across a full investment hold period — including purchase, annual cash flows, and eventual sale proceeds. It is the most comprehensive return metric for real estate.
Unlike cash-on-cash (which only looks at annual cash flow), IRR captures:
- Annual cash flow distributions
- Principal paydown (equity buildup)
- Appreciation and sale proceeds
- Timing of cash flows
A higher IRR = better investment. Most institutional investors target 12–18%+ IRR for value-add plays. IRR is calculated iteratively (no simple formula) — use Excel's IRR() function or a financial calculator.
Related Terms
Cash-on-Cash Return
Annual pre-tax cash flow divided by total cash invested.
Equity Multiple
Total cash returned divided by total cash invested — shows how many times you multiplied your money.
Return on Equity (ROE)
Annual cash flow divided by your current equity in the property — measures efficiency of deployed capital.