February 26, 2025•3 min read
Internal Rate of Return (IRR): The Ultimate Long-Term Metric
RentalIntel Team
Real Estate Investment Experts
Real estate isn’t just about yearly cash flow—it’s about long-term growth.
That’s where Internal Rate of Return (IRR) comes in.
The Formula
IRR is calculated using complex formulas or financial models, but in simple terms, it's:
Where:
- NPV = Present value of future cash flows - Initial investment
- IRR accounts for both cash flow and appreciation over time.
Real-Life Example
Your Investment
| Investment Details | Amount |
|---|---|
| Initial Cash Invested | $50,000 |
| Annual Cash Flow (Years 1-5) | $8,000 |
| Sale Price After 5 Years | $300,000 |
| Mortgage Balance at Sale | -$180,000 |
| Net Proceeds from Sale | $120,000 |
Using an IRR calculator, your IRR might be 16.2% over five years.
What Does a 16.2% IRR Mean?
- Better than a bank savings account? ✅ Yes
- Beats stock market average? ✅ Likely (historical S&P 500 average ~10%)
- Reflects both cash flow + appreciation? ✅ Absolutely
When IRR Matters (and When It Doesn’t)
✅ Best metric for multi-year investments
✅ Great for comparing different property deals
❌ Complex—requires calculations & software
❌ Can be misleading if future assumptions are wrong
Pro Tips
- Use IRR calculators or spreadsheets (manual math is tough).
- Compare IRR to alternative investments (stocks, bonds, etc.).
- Consider a mix of CoC, Cap Rate, and IRR for the full picture.
The Bottom Line
IRR helps you see the big picture of an investment over time.
The higher the IRR, the better the long-term return.
What’s your target IRR for real estate deals? Drop a comment below!
