Glossary
IRR (internal rate of return)
IRR (internal rate of return) is a single yearly return that accounts for when every dollar goes in and comes out of a deal, including the sale at the end.
Timing matters. Getting cash back sooner is worth more than getting the same cash later. IRR captures that, which simpler measures like ROI do not.
How it works
IRR is the discount rate that makes the value of all cash in and cash out equal zero. You rarely compute it by hand. Spreadsheets and calculators solve for it. Run The Deal computes a hold IRR from your cash invested, yearly cash flow and the sale proceeds at the end of the hold.
- Deal A: invest at the start
- $100,000
- Deal A: cash flow each year, 5 years
- $10,000
- Deal A: capital back at year 5
- $100,000
- Deal A IRR
- 10.0%
- Deal B: invest at the start
- $100,000
- Deal B: one payment at year 5
- $150,000
Both deals return $150,000 in total. Deal A wins on IRR because the cash comes back sooner.
What to watch
- Garbage in, garbage out. IRR depends heavily on the sale price you assume years from now.
- Hold length. A refi that returns cash early can lift IRR a lot.
- Size. A high IRR on a small amount of money can make you less than a lower IRR on a larger one.
Use IRR alongside cash on cash and cap rate, not instead of them. Run The Deal scores hold IRR of 12% as good and 8% as marginal by default. See it in the rental property calculator.
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