What Is IRR in Real Estate?

Key Takeaways

• IRR is the discount rate that makes the net present value of every cash flow, from the initial equity to the sale proceeds, equal zero.
• IRR rewards speed: the same dollars returned sooner produce a higher IRR, which is why short holds and early distributions can make a smaller profit look better.
• In most projected real estate IRRs the sale price carries much of the return, so a small change in the exit cap rate can move IRR by whole percentage points.
• Levered IRR measures the return on equity after debt; unlevered IRR measures the property itself. Debt magnifies IRR in both directions, including below the unlevered figure.
• Read IRR with the equity multiple and cash-on-cash return, and never compare one sponsor's projected IRR with another's realized IRR as if they were equivalent.

What IRR means in plain English

IRR is the single annual interest rate that would turn the money you put in into exactly the cash you got back, on exactly the dates you got it. If a savings account paying that rate would have produced the same stream of withdrawals, the account rate is the IRR.

Formally, IRR is the discount rate at which net present value equals zero. Net present value discounts each future cash flow back to today at a chosen rate and subtracts the investment; IRR is the rate that makes that total exactly zero. The CFA Institute describes IRR as an estimate of a project's rate of return, subject to certain assumptions, that can be compared with a hurdle rate. In performance measurement it is also called a money-weighted return, because it depends on when and how much money is in the investment.

There is no algebraic shortcut for solving it; software tries rates until net present value reaches zero. Excel's IRR function assumes evenly spaced periods, while XIRR uses actual dates, which matters when distributions are monthly or capital arrives unevenly.

Worked example: a hypothetical 5-year net lease hold

A worked example shows how IRR combines income and sale proceeds into one rate. Below, one hypothetical net lease property is modeled over a 5-year hold, first bought with all cash (unlevered) and then with an interest-only loan (levered), so the effect of debt on the same property cash flows is visible.

Consider a hypothetical $2,000,000 single-tenant property with $130,000 of net operating income, a 6.50% cap rate, and a lease that raises rent 10% in year 6. The hypothetical sale happens at the end of year 5 at a 6.50% cap rate on year-6 income of $143,000, or $2,200,000, less 2% selling costs, for net proceeds of $2,156,000. The levered case uses a hypothetical $1,200,000 interest-only loan at 6.00%, or $72,000 a year. Closing costs are excluded from this hypothetical.

Hypothetical example: annual cash flows, unlevered and levered

Year	Unlevered cash flow	Levered cash flow
0 (purchase)	-$2,000,000	-$800,000
1	$130,000	$58,000
2	$130,000	$58,000
3	$130,000	$58,000
4	$130,000	$58,000
5 (income plus sale)	$130,000 + $2,156,000 = $2,286,000	$58,000 + $956,000 = $1,014,000
IRR	7.83%	10.42%
Equity multiple	1.40x	1.56x

The levered year-5 figure is the hypothetical $2,156,000 of net sale proceeds minus the $1,200,000 loan payoff, or $956,000, plus that year's $58,000 of cash flow. Discounting each row at the hypothetical 10.42% levered IRR (or 7.83% unlevered) and summing gives zero, which is the definition at work.

How timing and exit assumptions drive IRR

Two inputs dominate most real estate IRRs: the sale price and the hold period. The sale price is usually set by an assumed exit cap rate, and because the sale is the largest single cash flow, modest changes in that assumption move IRR more than years of rent do. The table holds everything else in the hypothetical example constant.

Hypothetical example: the same 5-year hold at different exit cap rates

Exit cap rate	Gross sale price	Unlevered IRR	Levered IRR	Levered equity multiple
6.50%	$2,200,000	7.83%	10.42%	1.56x
7.00%	$2,042,857	6.52%	7.29%	1.37x
7.50%	$1,906,667	5.32%	4.23%	1.20x
8.00%	$1,787,500	4.22%	1.19%	1.05x

In this hypothetical, a 50 basis point wider exit cap cuts levered IRR by more than 3 percentage points, and at a 7.50% exit the levered IRR falls below the unlevered one: debt that helped on the way up hurts on the way down. The rent increase is doing quiet work here too; at roughly a 7.01% hypothetical exit cap the net sale price simply returns the $2,000,000 purchase price. More on this input in the exit cap rate assumption.

Timing works the same way. If the hypothetical property instead sold after 2 years at a 6.00% cap rate on $130,000 of income ($2,166,667 gross), the levered IRR would be 14.44% but the equity multiple only 1.30x, with $239,333 of profit instead of the $446,000 earned over 5 years at a 6.50% exit.

IRR vs equity multiple vs cash-on-cash return

IRR, the equity multiple and cash-on-cash return describe the same cash flows from three angles, and each hides something the others reveal. IRR captures timing but not scale; the equity multiple captures total profit but not time; cash-on-cash return captures current income but not the sale. Reading all three together is the minimum.

What each metric answers

Metric	Question it answers	What it leaves out
Cash-on-cash return	How much cash does my equity yield this year?	Sale proceeds, principal paydown, time
IRR	What annualized rate did all the cash, including the sale, earn?	Dollar size of the profit; the reinvestment question
Equity multiple	How many dollars came back per dollar invested?	How long it took

IRR also shows up inside fund documents. Some distribution waterfalls express the investor hurdle as an IRR, while others use a simple annual preferred return on contributed capital; the two can pay out differently even at the same stated percentage.

Levered vs unlevered IRR

Unlevered IRR is the return of the property itself, as if bought with all cash. Levered IRR is the return on the investor's equity after loan payments and payoff. The gap between them is the effect of debt, which is positive only while the property earns more than the debt costs.

In the hypothetical example the gap is 2.59 percentage points at a 6.50% exit and negative at a 7.50% exit. Asking for both figures separates the quality of the real estate from the financing decision; see positive leverage for the underlying test.

Fund-level IRRs add two more layers. Gross IRR is before fees and carried interest; net IRR is what investors keep. Short-term subscription credit lines let a fund buy first and call capital later, which shortens the measured holding period and can raise IRR without changing the property results. The SEC staff's marketing rule guidance addresses consistent treatment of subscription facilities in gross and net IRR, and the ILPA Performance Template (released January 2025) asks funds to report IRR and TVPI with and without their effect.

Common manipulations and mistakes

Most misleading IRRs are arithmetically correct. The distortion comes from what the number is asked to represent: a short hold, an optimistic sale, a fund-level financing choice, or a projection presented next to someone else's realized result. Each pattern below can be checked in minutes with the sponsor's year-by-year cash flow file.

• Short holds inflate IRR. A quick sale after a small gain produces a high IRR on little money, as the hypothetical 2-year case above shows. Always ask for the equity multiple and the dollar profit alongside it.
• The reinvestment question. IRR treats interim distributions as if they could keep earning the IRR. Modified IRR (MIRR) replaces that with a stated rate; reinvesting the hypothetical levered distributions at 5% gives an MIRR of 9.80% versus the 10.42% IRR.
• Projected vs realized. A projected IRR is a model output; a realized IRR is history. They are not comparable, and a projection should come with the assumptions that produce it.
• Gross vs net. Fees, promote and fund expenses sit between property IRR and investor IRR.
• Multiple or misleading IRRs. When cash flows change sign more than once, for example a mid-hold capital call for a roof or re-tenanting, more than one rate can solve the equation.
• Comparing across sizes and durations. A higher IRR on a smaller, shorter deal can mean less total wealth than a lower IRR held longer.

Frequently Asked Questions

Q: What is a good IRR for commercial real estate?

A: There is no single answer. A reasonable projected IRR depends on the risk of the tenant and lease, the amount of debt, the hold period and prevailing interest rates. More useful than a target number is asking how much of the IRR comes from income already under lease and how much depends on the sale.

Q: What is the difference between IRR and ROI?

A: ROI, or total return on investment, compares profit with the amount invested and ignores how long the money was tied up. IRR annualizes the return and weights each cash flow by its timing, so the same ROI earned over 3 years or 10 years produces very different IRRs.

Q: Why can IRR be high while the equity multiple is low?

A: Because IRR rewards speed. A small profit returned quickly annualizes into a high IRR, while the equity multiple shows the modest total. Deals with short holds or early refinancings often show this pattern.

Q: Is IRR the same as a preferred return?

A: No. A preferred return is a priority of payment in a fund or syndication waterfall, often stated as an annual percentage of contributed capital. Some waterfalls define their hurdles using IRR, but the pref itself is not a projection of what the investment will earn.

Q: What is the difference between gross IRR and net IRR?

A: Gross IRR is measured before management fees, fund expenses and the sponsor's share of profits. Net IRR is measured on the cash investors actually receive after those items, and is the figure that matters for comparing what an investor keeps.

Q: How do I calculate IRR in a spreadsheet?

A: List the cash flows in order with the investment as a negative number, then use =IRR(range) for equal annual periods or =XIRR(values, dates) when cash flows occur on specific dates such as monthly distributions.

Sources

1. CFA Institute, Capital Investments and Capital Allocation, Refresher Reading (2026)
2. CFA Institute, Rates and Returns, Refresher Reading (2026)
3. U.S. SEC, Division of Investment Management, Marketing Compliance FAQ (updated January 15, 2026)
4. ILPA, Updated Reporting Template and New Performance Template (January 22, 2025)

This page is for informational purposes only and is not an offer to sell or a solicitation of an offer to buy any security, nor investment, tax, or legal advice. Examples are hypothetical unless a source is cited. Consult your own advisors about your situation.