In one sentence
The annualized discount rate at which an investment's cash flows net to zero, the standard time-weighted return measure.
The longer version
IRR expresses an investment's return as an annualized rate that accounts for the timing of cash flows: earlier returns are worth more. It is the headline return figure in most real estate investment models.
Lenders encounter IRR in sponsor projections. It is sensitive to assumptions and timing, so it is read alongside simpler measures like equity multiple and cash-on-cash.
Common questions
- What is IRR in real estate?
- The annualized discount rate at which the present value of an investment's cash flows equals zero, the standard measure of time-weighted return.
- Why is IRR paired with equity multiple?
- Because IRR captures timing but can be high on small, quick returns. Equity multiple shows total return but ignores timing. Together they describe the deal.
- Does a lender underwrite IRR?
- Not directly. Lenders focus on the property's ability to repay. IRR matters for understanding the sponsor's motivation and the business plan's feasibility.
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