Internal Rate of Return (IRR)

IRR is the annualized rate of return that sets the net present value of all projected cash flows (including the eventual sale) to zero, capturing both the timing and magnitude of cash flows over an investment's full hold period. It's the standard metric institutional investors and sponsors use to evaluate and compare deals with different cash flow timing, hold periods, and exit assumptions.

IRR is powerful precisely because it accounts for the time value of money and the specific timing of every cash inflow and outflow — a dollar received in year one is worth more than a dollar received in year five, and IRR captures that distinction in a way that a simple average annual return or cash-on-cash calculation cannot.

Because IRR is sensitive to timing, it can be significantly boosted by early distributions or a faster exit, even if the total dollars returned are the same — which is why savvy investors look beyond the headline IRR number to also review the equity multiple (total dollars returned relative to invested capital) to get the full picture of a deal's economics.

IRR projections are only as good as the underlying assumptions driving them — rent growth, exit cap rate, hold period, and renovation costs — so investors should stress-test a sponsor's projected IRR against more conservative assumptions before relying on it, especially on value-add or development deals where projections carry more uncertainty than on stabilized core acquisitions.

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