How do you calculate IRR?

IRR is the discount rate that makes NPV equal to zero. For real estate: initial investment (negative), annual cash flows, and exit proceeds. The formula requires iterative calculation.

What is the difference between IRR and cash-on-cash return?

Cash-on-cash measures single-year return (annual cash flow / cash invested). IRR considers all cash flows over the holding period including exit, accounting for time value of money.

What is the difference between IRR and equity multiple?

Equity multiple shows total return (total cash / initial investment) but ignores timing. A 2x multiple over 3 years equals ~26% IRR, but 2x over 10 years equals only ~7% IRR.

What is a modified IRR (MIRR)?

Modified IRR addresses a limitation of standard IRR by assuming cash flows are reinvested at a specified reinvestment rate (usually the cost of capital) rather than at the IRR itself. This produces more realistic return estimates, especially for projects with very high or very low standard IRRs. MIRR is less commonly used in real estate but is valuable for comparing investments with different cash flow profiles.

IRR Calculator | Real Estate Investment Returns

IRR Calculator Internal Rate of Return

See what you actually make over the hold. Not just year-one cash flow.

Internal Rate of Return (IRR) is the annualized rate of return that makes the net present value (NPV) of all cash flows from an investment equal to zero. Unlike cap rate or cash-on-cash return, IRR accounts for the time value of money across the entire holding period — including annual cash flows and exit proceeds. A 2x equity multiple over 3 years produces ~26% IRR, but the same 2x over 10 years produces only ~7% IRR.

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Investment Strategy Profiles

Core (6-9% IRR)

Stabilized, Class A assets in primary markets. Long-term credit tenants. Lowest risk, lowest return.

Core-Plus (9-12% IRR)

Stabilized with minor value-add. Below-market rents or light repositioning potential.

Value-Add (12-18% IRR)

Significant capital investment, repositioning, or operational improvements required.

Opportunistic (18%+ IRR)

Ground-up development, distressed acquisitions, or speculative plays with execution risk.

Example Calculation

You invest $1,000,000 in a multifamily property. It generates $80,000/year in cash flow for 5 years, then sells for $1,400,000.

Year 0: -$1,000,000 (investment)
Years 1-4: +$80,000 each
Year 5: +$80,000 + $1,400,000 = $1,480,000

IRR = 15.24% | Equity Multiple = 1.80x | Profit = $800,000

IRR vs. Other Metrics

Equity Multiple: Total cash returned ÷ cash invested. Ignores timing. 2x in 3 years is better than 2x in 10 years.
Cash-on-Cash: Single year's cash flow ÷ equity. Snapshot metric that ignores appreciation and exit.
Cap Rate: NOI ÷ Property value. Entry metric only, ignores growth and leverage effects.

Frequently Asked Questions

What is a good IRR for commercial real estate?

Target IRRs vary by strategy: Core (6-9%), Core-Plus (9-12%), Value-Add (12-18%), and Opportunistic (18%+). According to NCREIF, the average 10-year return for institutional CRE was approximately 8.5% through Q3 2024.

What's the relationship between IRR and equity multiple?

Both matter but measure different things. A 2.0x equity multiple over 10 years produces ~7% IRR, while the same 2.0x over 5 years produces ~15% IRR. Sophisticated investors evaluate both: IRR for time-adjusted returns, equity multiple for absolute profit.

Why do institutions use IRR?

IRR allows apples-to-apples comparison across investments with different holding periods, cash flow profiles, and exit timings. It's the basis for promote structures in most LP/GP arrangements and the standard metric for fund performance reporting.

What are IRR's limitations?

IRR assumes reinvestment at the IRR rate, which may be unrealistic. It can also be manipulated by timing: delaying investments or accelerating exits. That's why sophisticated investors also look at equity multiple, cash-on-cash, and NPV at a required hurdle rate.

What is the difference between levered and unlevered IRR?

Unlevered IRR measures returns on total project cost without debt, showing the property's intrinsic return. Levered IRR measures returns on equity after debt service. Leverage amplifies returns in both directions: higher IRR when property returns exceed borrowing cost, lower when they don't.

How does holding period affect IRR?

Shorter holding periods generally produce higher IRRs because returns are compressed into fewer years. A 50% total return over 2 years equals ~22% IRR, but the same 50% over 5 years equals ~8.4% IRR. Evaluate both IRR and equity multiple to avoid being misled by timing effects.

How do institutional investors benchmark IRR?

Investors benchmark against indices like NCREIF for private real estate and NAREIT for public REITs. Typical targets: Core 6-9%, Core-Plus 9-12%, Value-Add 12-18%, Opportunistic 18%+.