IRR Calculator

How to Use the IRR Calculator

The calculator models a five-year hold, the most common horizon in commercial real estate underwriting.

1. Initial investment (Year 0) — the cash you put in: your down payment plus closing costs and any up-front renovation. If you are financing the purchase, enter your equity, not the full price.
2. Annual cash flows (Years 1–5) — what the property pays you each year after operating expenses and loan payments.
3. Sale proceeds (Year 5) — what you receive when you sell: the sale price minus selling costs and the loan payoff.

The calculator finds the discount rate at which the present value of everything you receive equals what you put in. That rate is the internal rate of return. It also shows the equity multiple: total cash returned divided by cash invested.

Worked Example

You invest $1,000,000 of equity. The property pays you $60,000, $62,000, $64,000, $66,000 and $68,000 over five years, and you net $1,250,000 from the sale at the end of year 5.

The equity multiple tells you how much you made; the IRR tells you how fast. A 1.57x multiple over five years works out to about 10.4% a year, compounded.

Why IRR and Equity Multiple Disagree

Two deals can have the same equity multiple and very different IRRs. Getting your money back sooner raises IRR, because early dollars can be reinvested. That's why value-add deals with a quick refinance often show high IRRs on modest multiples, and long-term core deals show the opposite. Look at both:

• IRR answers "how good is this per year?" and lets you compare investments with different timelines.
• Equity multiple answers "how much money do I end up with?" and can't be flattered by timing.

What Counts as a Good IRR?

Target returns depend on risk. As a rough guide used by many sponsors, stabilized core properties are often underwritten to high single-digit levered IRRs, value-add deals to the mid-teens, and ground-up development higher still to compensate for construction and lease-up risk. Compare your result with what investors are being offered on similar deals, and with your own cost of capital.

Tips for Better Inputs

• Be conservative on the sale. Exit value drives most of a five-year IRR. Assume a sale cap rate slightly higher than today's purchase cap rate rather than lower.
• Include capital spending. If you'll replace a roof in year 3, reduce that year's cash flow.
• Use after-debt cash flow. For a levered IRR, cash flows must be after mortgage payments, and sale proceeds after paying off the loan. Get the payment from the commercial mortgage calculator.

Questions About This Calculator

Can I model a hold longer than five years? Not in this version. For a longer hold, add the extra years' cash flow into year 5 and treat the result as an approximation.

Is this IRR before or after tax? Before tax. Depreciation and a 1031 exchange can raise your after-tax return considerably.

Why might the result look wrong? IRR assumes the investment starts negative and turns positive. If cash flows change sign more than once (for example, a large capital call in year 3), there can be more than one mathematical answer.