THE SHORT ANSWER
Internal rate of return, or IRR, is the discount rate that makes the net present value of a series of cash flows equal zero. It accounts for the amounts and timing entered into a model. A projected IRR describes that model, not an assured investment outcome.
TRY THE MATH
IRR calculator
Hypothetical example values. Replace them with your own assumptions. Nothing is saved or sent.
An educational calculation, not a property valuation or financing decision. Definitions and lender adjustments can differ. Check the guide’s assumptions and limitations.
What goes into the calculation
Enter invested cash as negative amounts and money received as positive amounts. Include additional contributions, operating distributions, and net sale proceeds at the correct times. Net sale proceeds should account for the relevant selling costs and remaining debt.
For equally spaced periods, the equation is 0 = CF₀ + CF₁/(1+r) + CF₂/(1+r)² + … + CFₙ/(1+r)ⁿ. The unknown r is the IRR per period. Annual periods produce an annual rate; monthly periods do not automatically do so.
A deliberately simple hypothetical example
Imagine contributing $100,000 today, receiving $10,000 after year one, $10,000 after year two, and $110,000 after year three. With exactly annual spacing, those cash flows have a 10% IRR. The last amount includes the return of the initial $100,000 in this simplified example.
Those figures are invented to explain the formula. Real properties can require additional cash and may sell for less than expected. Shift the final proceeds later or lower them, and the calculated IRR changes even if the earlier payments stay the same.
Use the right timing and perspective
A standard IRR calculation assumes regular periods. Use a date-based method such as XIRR for irregular cash-flow dates. Check whether a quoted result is before or after debt, sponsor fees, and investor-level allocations.
An investor's cash flows can differ from property-level cash flows. Partnership fees and distribution rules belong in the investor's model. A project-level result should not be presented as though every participant receives it.
Do not let the exit assumption hide the operating plan
IRR can be highly sensitive to the sale price, sale date, and refinance distributions. Compare an equity multiple, actual dollar cash flows, capital at risk, and downside scenarios alongside the rate.
Some cash-flow patterns have multiple IRRs or no usable IRR. A calculator should flag these limitations rather than inventing a result. Net present value using an explicitly chosen discount rate can help compare scenarios when a single IRR is ambiguous.
- Label projections as projections.
- Show the cash-flow schedule, not only the percentage.
- Test a later sale and lower net sale proceeds.
- Keep modeled returns separate from realized performance.
Common questions
Is IRR the same as cash-on-cash return?
No. IRR considers an entered cash-flow sequence and its timing. Cash-on-cash return usually compares one period's cash flow with a defined invested-cash amount.
Can a high projected IRR still describe a risky deal?
Yes. It may rely on optimistic assumptions, leverage, or a rapid exit. The calculation does not establish the probability of receiving the modeled cash flows.
Sources & further reading
Educational content from Real Estate 101. Updated 2026-09-05. Refer to the original sources and your professional advisers for transaction-specific requirements.