Real Estate Investing Glossary

Internal Rate of Return (IRR)

Last reviewed July 15, 2026

IRR is the annualized rate of return that accounts for every cash flow of an investment and the timing of each one, from purchase through sale.

What is the internal rate of return?

Internal rate of return (IRR) is the most complete single measure of an investment’s performance. Technically, it is the discount rate that makes the net present value of all cash flows, the initial investment out, rental cash flow in, and sale proceeds in, equal zero. In plain terms, it is the annualized compound return on your money, weighted by when each dollar arrives.

Timing is what makes IRR different from simpler metrics. A dollar received in year one is worth more than a dollar received in year ten, and IRR reflects that. Two deals can return the same total profit, but the one that pays you sooner will show a higher IRR. This is why syndications and funds, where investors care about both how much and how fast, quote IRR as their headline number.

IRR has quirks: it assumes interim cash flows can be reinvested at the same rate, and it can be gamed by short holds or early refinances that return capital quickly. Pair it with the equity multiple, which measures total profit, to judge a deal on both speed and size of returns.

Worked example

You invest $50,000 in a rental, collect $4,000 of cash flow each year for five years, and net $70,000 at sale. Total profit is $40,000, and because the cash arrived over five years the IRR works out to roughly 12.9% per year, higher than the 8% cash-on-cash because it also captures the sale gain.

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Frequently asked questions

What is a good IRR for a real estate deal?: Stabilized rental properties and core real estate funds often target 8% to 12% IRR, value-add deals 12% to 18%, and opportunistic or development projects 18% and up. Higher targets come with higher risk and more reliance on assumptions about rents, exit prices, and timelines, so always ask what has to go right for a projected IRR to materialize.
Why can two deals with the same profit have different IRRs?: Because IRR weights cash flows by time. If one deal returns your capital in year two and another in year seven, the faster deal has a higher IRR even if total dollars are identical, since you could reinvest the early proceeds. That time-sensitivity is IRR’s main advantage over simple return-on-investment math and also why it should be read alongside the equity multiple.

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What is the internal rate of return?

Frequently asked questions

What is a good IRR for a real estate deal?

Stabilized rental properties and core real estate funds often target 8% to 12% IRR, value-add deals 12% to 18%, and opportunistic or development projects 18% and up. Higher targets come with higher risk and more reliance on assumptions about rents, exit prices, and timelines, so always ask what has to go right for a projected IRR to materialize.

Why can two deals with the same profit have different IRRs?

Because IRR weights cash flows by time. If one deal returns your capital in year two and another in year seven, the faster deal has a higher IRR even if total dollars are identical, since you could reinvest the early proceeds. That time-sensitivity is IRR’s main advantage over simple return-on-investment math and also why it should be read alongside the equity multiple.