The time-weighted, all-in annualized return of a real estate deal.
The Internal Rate of Return (IRR) is the annualized, time-weighted return on a real estate investment that accounts for every cash flow — initial equity, periodic distributions, and sale proceeds at exit. IRR is the standard measure of return on institutional real estate because it captures both the magnitude and the timing of cash returned to the investor.
IRR is the single most important return metric in institutional and value-add real estate. Where cap rate and cash-on-cash are point-in-time snapshots, IRR captures the full picture: initial equity goes in at t=0 (as a negative cash flow), distributions come out over the hold period (positive), and sale proceeds come out at exit (typically the biggest positive). IRR is the discount rate that makes the present value of all those cash flows equal to zero — the implied annualized rate the investor earned.
The key insight: IRR weights early returns more heavily than late returns. A deal that pays back capital quickly through a refi or distribution will produce a higher IRR than an equivalent deal that returns the same total dollars but only at a sale 7 years later. This is why BRRRR and value-add deals frequently produce 20%+ IRRs even when the absolute profit dollars are modest — the capital recycles fast.
Target IRR varies sharply by strategy. Core stabilized deals target 8–12% IRR. Value-add targets 14–18%. Opportunistic / development targets 18–25%+. Levered IRR (after debt service) is what most operators report; unlevered IRR (the same calculation with no debt) is used to compare the underlying asset performance without financing distortion.
The biggest limitation of IRR is that it doesn't tell you how much money you made — only what rate it grew at. A 30% IRR on a $50k investment for one year is $15k of profit; a 12% IRR on a $1M investment for 5 years is $815k. Always pair IRR with Equity Multiple to see both the rate and the absolute dollars.
| Year 0: Equity invested | ($1,000,000) |
| Year 1: Distribution (interest only / capex year) | $10,000 |
| Year 2: Distribution (stabilized) | $95,000 |
| Year 3: Distribution | $110,000 |
| Year 4: Distribution | $125,000 |
| Year 5: Final distribution + sale proceeds | $1,820,000 |
| Total cash returned | $2,160,000 |
| Equity Multiple | 2.16x |
| IRR (5-year hold) | ~18.4% |
It depends on strategy. Core stabilized deals target 8–12%, value-add 14–18%, opportunistic and development 18%+. Anything above the strategy-appropriate range is exceptional; anything below means the deal didn't outperform its risk class.
Cash-on-Cash is a single-year cash yield. IRR is the annualized return over the full hold period, including all distributions and sale proceeds, time-weighted. A deal can have low year-one cash-on-cash but a high IRR if the back-end exit is strong.
Levered IRR includes the effect of debt — equity invested, debt service paid, and equity returned. Unlevered IRR is the same calculation assuming the property was bought all-cash. Levered IRR is usually higher because leverage amplifies returns; unlevered isolates the underlying asset.
No — IRR is a pre-tax cash flow metric. Depreciation is a non-cash expense that flows through the K-1 to investor taxes but doesn't affect the IRR calculation itself.
IRR ignores absolute dollars. A 30% IRR on a small or short deal might generate less profit than a 12% IRR on a large 5-year hold. Always look at IRR + Equity Multiple together.
Matrix structures bridge, fix-and-flip, and rehab loans designed for operators chasing value-add IRR. Right-sized leverage, sharp exit pricing, and execution that protects your timeline.
