Internal Rate of Return (IRR)
The total annualized return including all sources of wealth.
Formula
IRR = Discount rate where NPV of all cash flows = 0
IRR accounts for: monthly cashflow, principal paydown, property appreciation, and the net sale proceeds. It's the "true" return over a hold period.
What Is It?
IRR is the most comprehensive return metric. It captures every dollar in and every dollar out, time-weighted. Think of it as the "interest rate" your invested capital earns over the entire holding period.
Worked Example
Buy for $500K (20% down), hold 10 years, sell for $750K.
| Cash Invested | $112,500 |
| Annual Cashflow | $2,400/yr |
| Appreciation | 5%/yr |
| Mortgage Paydown (10yr) | ~$52,000 |
| Sale Price | ~$750,000 |
Why It Matters
- ✓Captures ALL return sources: cashflow + appreciation + equity + tax benefits
- ✓Time-weighted — penalizes deals where returns come late
- ✓Standard metric used by institutional investors and private equity
- ✓Best metric for comparing real estate to stocks, bonds, or other investments
What's Good vs Bad?
Excellent
15%+ (strong total return)
Good
10–15%
Poor
Below 8% (barely beats stock market)
Limitations
- ⚠Requires assumptions about future appreciation and exit price
- ⚠Sensitive to hold period — 5yr vs 10yr can swing IRR dramatically
- ⚠Doesn't account for liquidity risk (stocks are easier to sell)
- ⚠Multiple IRRs possible with irregular cash flows (rare in RE)
How Prop2Profit Uses This Metric
Prop2Profit shows a 10-year investor projection on the detail page analysis. IRR is estimated using conservative (4%), moderate (5.5%), and optimistic (7%) SD appreciation rates.