Internal Rate of Return (IRR)
The annualized rate of return on an investment accounting for the timing and magnitude of all cash flows.
Definition
Internal Rate of Return (IRR) is the annualized discount rate that makes the net present value (NPV) of all cash flows from an investment equal to zero. In plain terms, it's the actual average annual return on your invested capital over the entire hold period — accounting for when cash flows occur.
Unlike cash-on-cash return (which is a point-in-time metric), IRR captures the full picture: monthly cash flows, the timing of capital events (refinances), and the sale proceeds at exit. A deal with identical total profits may have dramatically different IRRs depending on how quickly those profits are returned.
IRR is the gold standard for comparing investments across different hold periods and capital structures. Institutional investors target IRRs of 15–20%+ for value-add multifamily; experienced individual investors aim for 12–18%+ on levered deals. A 20% IRR is exceptional; anything above 25% warrants extra scrutiny of the assumptions.
Related Terms
Cash-on-Cash Return
Annual pre-tax cash flow divided by total cash invested, expressed as a percentage.
Pro Forma
A financial projection document showing expected income, expenses, and returns for an investment property.
Exit Strategy
The plan for how and when an investor will eventually sell or dispose of an investment property.
Cap Rate
Capitalization rate — the ratio of a property's net operating income to its market value.
Equity
The difference between a property's market value and the outstanding balance of all loans against it.
Related Article
How to Analyze a Small Multifamily Property (Duplex to 8-Unit)
9 min · Multifamily