Full Definition
Internal Rate of Return is the discount rate that makes the net present value of all cash flows (initial investment, annual distributions, and sale proceeds) equal to zero. Unlike cap rate or cash-on-cash (which are snapshots), IRR measures total return over time, time-weighted.
Example
A $500K investment that returns $30K annually for 5 years and sells for $700K at year 5 has an IRR of approximately 12-13%.
Why It Matters
IRR is the gold-standard return metric because it accounts for the time value of money and captures both cash flow and appreciation.
Related Terms
Cash-on-Cash Return
Annual pre-tax cash flow divided by total cash invested. The levered return on your actual equity.
Equity Multiple
Total cash distributions divided by total cash invested. A simple multiplier showing how many times you got your money back.
Cap Rate (Capitalization Rate)
The ratio of a property's Net Operating Income to its purchase price, expressed as a percentage. The primary metric for comparing commercial real estate investments.