IRR
Internal rate of return
Internal rate of return is the annual discount rate at which the deal's cash flows — the money in at purchase, the cash flow each year and the net proceeds at sale — net out to zero. Unlike cash-on-cash it accounts for timing, so a large payday at year ten is worth less than the same payday at year three.
0 = Σ cash flow at year t ÷ (1 + IRR)^t
Worked example
Holding the standard deal ten years and selling produces an IRR in the low teens, most of which arrives as sale proceeds rather than as rent.
Every example in this glossary uses the same deal: a $265,000 duplex renting for $2,650 a month, bought with 25% down at 6.75% over 30 years, producing $19,310 of net operating income.
The mistake to avoid
Where this is calculated
The real estate investment calculator computes this from your own numbers and shows the arithmetic expanded. Year-by-year projection to your exit, with equity multiple and IRR at every possible sale year.
Related terms
- Capitalization rateThe capitalization rate is net operating income divided by price, expressed as a percentage.
- Cash-on-cash returnCash-on-cash return is annual pre-tax cash flow divided by the total cash you actually put into the deal — down payment, closing costs and rehab.
- Gross rent multiplierGross rent multiplier is purchase price divided by gross annual scheduled rent.
- Equity multipleEquity multiple is total cash returned divided by total cash invested, with no adjustment for time.
- Break-even occupancyBreak-even occupancy is the occupancy at which annual pre-tax cash flow is exactly zero — the share of gross potential income the property must collect to cover operating expenses and debt service with nothing left over.
Back to the full glossary — 20 terms with formulas and worked examples.