IRR for Rental Property: What It Means and When to Trust It
The only common metric that accounts for time — which is exactly why it is the easiest one to inflate.
−1% to 13.7%
The IRR range on one deal, moving only the appreciation assumption.
What IRR is
Internal rate of return is the discount rate at which the present value of every cash flow — the money you put in, the money the property throws off, and the net proceeds when you sell — adds up to exactly zero.
0 = −C₀ + CF₁/(1+r) + CF₂/(1+r)² + … + (CFₙ + Net Sale)/(1+r)ⁿ
Solved numerically, not algebraically. DealQuanta uses bisection, which is stable for the sign pattern real estate produces.
The practical meaning: IRR is the constant annual rate your money would have to earn, with interest compounding, to produce the same result as this deal. It is the only common rental metric that knows the difference between a dollar in year one and a dollar in year ten — and the only one that includes the sale.
A worked five-year hold
The $240,000 example used throughout these guides: $2,100 rent, NOI $15,004, 25% down at 6.75% on a 30-year loan, $7,200 closing costs. Rent and expenses both grow 3% a year; the loan payment does not, which is why cash flow grows faster than 3%. Sold in year five at 3% annual appreciation with 7% total selling costs.
Cash flow timeline
- Year 0 — down payment + closing costs
- −$67,200
- Year 1 cash flow
- $995
- Year 2 cash flow
- $1,445
- Year 3 cash flow
- $1,910
- Year 4 cash flow
- $2,390
- Year 5 cash flow
- $2,885
- Year 5 sale price (3%/yr)
- $278,225
- Less 7% selling costs
- −$19,476
- Less remaining loan balance
- −$168,977
- Net sale proceeds
- $89,772
IRR ≈ 8.4%
Compare that to the deal’s year-one cash-on-cash return of 1.5%. The gap is not magic — it is principal paydown and appreciation finally being counted, and the fact that most of the return arrives in one lump at the end.
The part that should make you cautious
Almost all of that 8.4% lives in the sale. Change only the appreciation assumption and hold everything else identical:
| Annual appreciation | Net sale proceeds (year 5) | IRR |
|---|---|---|
| 0% | $54,223 | ≈ −1% |
| 3% | $89,772 | ≈ 8.4% |
| 5% | $115,889 | ≈ 13.7% |
Read the 0% row carefully
So an IRR quoted without its appreciation assumption tells you nothing. If someone shows you a sponsor deck with a 15% IRR, the first two questions are always: what appreciation rate, and what exit cap rate?
The four inputs that move it most
| Input | Why it matters | How to handle it |
|---|---|---|
| Appreciation / exit value | Dominates any hold under about ten years. | Run the analysis at 0% as your base case. Treat anything above that as upside, not plan. |
| Hold period | Short holds are punished by transaction costs; long holds dilute an early value-add. | Model your actual intended hold, not a convenient five years. |
| Selling costs | 6–8% of sale price, and entirely predictable. | Never leave them out. They are the difference between a positive and negative short hold. |
| Rent and expense growth | Compounds over the hold; expenses often grow faster than rent. | Do not assume rent grows faster than expenses unless you can say why. |
When IRR is the wrong tool
IRR assumes interim cash flows are reinvested at the IRR itself, which is optimistic for a high-IRR deal — you probably cannot find another 14% opportunity for every $2,000 of cash flow. It also behaves badly when cash flows change sign more than once (a mid-hold capital call can produce multiple mathematical solutions), and it is meaningless for a hold with no assumed sale.
Practical rule: use IRR to compare deals of similar hold length and structure. Use cash-on-cash to know what you can spend, and DSCR to know whether you survive long enough to reach the sale. IRR is one of the six factors in the DealQuanta Score precisely because it is powerful but should never be the only voice in the room.
The full analyzer computes IRR over your chosen hold period and runs the appreciation sensitivity automatically, so the table above takes one click rather than three spreadsheet copies.
Frequently asked questions
What is a good IRR for a rental property?
For a leveraged buy-and-hold residential rental over five to ten years, 10 to 14% is a common target. The far more important question is what appreciation rate produced it — an IRR of 14% built on 5% annual appreciation is a very different proposition from 10% built on zero.
What is the difference between IRR and cash-on-cash return?
Cash-on-cash is a single-year ratio of spendable cash to cash invested. IRR spans the whole hold, includes principal paydown and the net sale proceeds, and weights early cash flows more heavily than late ones. On the same deal IRR is usually several times higher, because it counts returns that cash-on-cash deliberately excludes.
How is IRR calculated for real estate?
There is no closed-form solution, so it is found numerically — a solver adjusts the discount rate until the present value of all cash flows, including the year-zero investment and the net sale proceeds, equals zero. Bisection is a common and stable method for the single sign change typical of a rental deal.
Should IRR include the sale of the property?
Yes — it is not IRR without it. The net sale proceeds, after selling costs and after paying off the loan balance, are usually the largest single cash flow in the series and frequently account for most of the return.
Why is my IRR negative?
Most often because selling costs and a modest appreciation assumption together exceed the equity you built through paydown and cash flow. This is common on holds shorter than about five years, and it is a genuine result rather than a modelling error — short holds are expensive.