Definition
Real estate IRR captures the total return including rental cash flows, tax benefits, mortgage paydown, and eventual sale proceeds. Unlike cap rate or cash-on-cash (which are single-period metrics), IRR measures the time-weighted return over the entire holding period. Real estate investors typically target 15-20% IRR for value-add deals and 8-12% for stabilized core properties.
lightbulb Example
Buy property for $500K with $125K down. Annual cash flow: $12K/year for 7 years. Sell for $650K, repay $250K mortgage, net $400K. IRR calculation: -$125K initial, +$12K×7, +$400K terminal = IRR ≈ 18.5%.
verified_user Key Points
- Comprehensive total return metric
- Includes cash flow, appreciation, and sale proceeds
- Target: 15-20% for value-add, 8-12% for core
- Time-weighted—accounts for when cash flows occur