IRR Calculator
Calculate Internal Rate of Return for a real estate investment with annual cash flows and a sale at exit.
Enter as positive number (will be treated as outflow)
What is IRR?
Internal Rate of Return (IRR) is the discount rate that makes the Net Present Value (NPV) of all cash flows equal to zero. It represents the annualized effective compounded return rate.
IRR is considered the "holy grail" metric for real estate investors because it accounts for the time value of money and all cash flows including the final sale.
Typical IRR Targets:
- Core: 8-10% (low risk, stabilized)
- Core Plus: 10-14%
- Value-Add: 14-20%
- Opportunistic: 20%+ (high risk, development)
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Expert FAQ
What is the primary difference between IRR and Equity Multiple?
Equity Multiple measures absolute profit ($ return vs. $ invested), whereas IRR measures the speed of that profit. You can have a high equity multiple with a low IRR if the hold period is too long.
How does the "Timing of Cash Flows" disproportionately impact IRR?
For an IRR calculation, a dollar received in Year 1 is significantly more valuable than a dollar in Year 5. Front-loading cash flows (e.g., through high early rents) boosts IRR dramatically.
What is a "Hurdle Rate" in an institutional waterfall?
A hurdle rate is the IRR threshold (e.g., 8%) that must be met before the sponsor (GP) begins receiving their "promote" or performance-based profit share.
Why is the "Terminal Cap Rate" the biggest risk in an IRR model?
The terminal cap rate determines the sale price in Year 5 or 10. A slight 0.5% shift in this assumption can swing the final IRR by hundreds of basis points.
What are the pitfalls of the "Modified IRR" (MIRR)?
MIRR assumes that interim cash flows are reinvested at a lower "safe" rate rather than the high internal rate of the project. It provides a more conservative but often less "market-typical" view for investors.