Internal rate of return is the metric that ties a whole deal together, from your first dollar in to your last dollar out, and this free IRR calculator estimates it for you. Enter your cash flows over the hold and your sale proceeds, and you get the IRR.
What makes IRR powerful is that it accounts for timing. A dollar you get back next year is worth more than a dollar you get in year ten, and IRR is the one return metric that captures that. Here is the tool, then how to read it.
IRR, in one line: internal rate of return is the annualized return that accounts for the timing and size of every cash flow in a deal, including the sale.
Why timing matters: IRR rewards getting money back sooner. Two deals with the same total profit can have very different IRRs depending on when the cash arrives.
How to Use the IRR Calculator
Enter your initial investment as money out, then each year's cash flow, then your net sale proceeds in the final year. The calculator finds the single annual rate that makes all of those cash flows balance to zero, which is your IRR.
The reason IRR is worth the extra effort is timing. Cash on cash tells you what a deal returns in a given year, but it cannot compare a deal that pays you steadily to one that pays off big at sale. IRR can, because it weighs when every dollar shows up. I use it alongside cash on cash and equity multiple, which I walk through in this video.
Watch: Calculating Commercial Real Estate Investment Returns [Three Methods]
What IRR Does Not Tell You
IRR is powerful but it has blind spots. It says nothing about the size of the deal, so a great IRR on a tiny investment can be less money than a lower IRR on a big one. That is why I always look at IRR next to the equity multiple, which tells you how many times you got your money back. Use them together: IRR for the annualized, time-sensitive return, and equity multiple for the total.
IRR Calculator FAQ
What is a good IRR for real estate?
It depends on the risk. Stabilized commercial deals might target a low-to-mid teens IRR, while value-add or development deals are underwritten to higher IRRs to compensate for the added risk.
How is IRR different from cash on cash return?
Cash on cash measures a single year's return on your invested cash. IRR accounts for every cash flow over the entire hold, including the sale, and weighs them by timing, so it reflects the full life of the deal.
What is the difference between IRR and equity multiple?
IRR is time-sensitive and annualized, so it rewards getting money back sooner. Equity multiple ignores timing and simply tells you how many times you got your money back. Investors use both together.
Can IRR be misleading?
Yes. IRR ignores deal size and assumes you can reinvest interim cash flows at the same rate, so a high IRR on a small or short deal can represent less total profit than a lower IRR on a larger one.
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