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IRR (Internal Rate of Return)
The annualized return that accounts for the timing and magnitude of all cash flows over the investment period.
Definition
Internal Rate of Return is the discount rate that makes the net present value of all cash flows from an investment equal to zero. Unlike simpler metrics, IRR accounts for when cash flows occur, giving more credit to earlier returns. For real estate, IRR captures rental income, appreciation, principal paydown, tax benefits, and the eventual sale proceeds. A property that returns capital quickly through cash flow and is sold at a gain will have a higher IRR than one with the same total return spread over more years. IRR is considered the gold standard metric for comparing investments with different time horizons and cash flow patterns.
Related Terms
NPV (Net Present Value)
The difference between the present value of future cash flows and the initial investment cost.
Cash-on-Cash Return
The annual pre-tax cash flow divided by the total cash invested, measuring the return on actual dollars deployed.
ROI (Return on Investment)
The total return earned on an investment expressed as a percentage of the amount invested.
Equity
The difference between a property's market value and the outstanding mortgage balance.
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