Property IRR Calculator

What is property IRR?

The Internal Rate of Return is the discount rate that makes the net present value of a project's cash flows equal to zero. In real estate, that means: "given the equity I put in today, the cash flow I receive each year, and the net proceeds when I sell, what annualised compound return am I getting?" It's the single most rigorous yardstick in real-estate analysis because it captures four things at once — appreciation, cash flow, leverage, and time.

How the model works

For each year of the hold period:

• Year 0: equity invested (down payment + closing costs) — a negative cash flow.
• Years 1 to N-1: NOI − debt service (interest + principal) = annual cash flow.
• Year N (sale year): annual cash flow PLUS sale proceeds (exit value × (1 − selling costs) − remaining loan balance).

IRR is the rate that, when applied to discount these cash flows back to year 0, sums to zero.

The exit value question

You have two options:

• Appreciation-only (set exit cap = 0): exit price = purchase price × (1 + appreciation%)^N. Simple but oversimplified.
• Exit cap rate: exit price = (NOI in year N+1) ÷ (exit cap rate). More realistic for commercial-style analysis — captures the idea that the buyer at exit will pay a multiple of forward NOI, not a multiple of today's price.

The exit cap rate is the most consequential single assumption in your model. Test ±50bps in each direction: if a 50bp move in exit cap swings IRR by 4+ percentage points, you're underwriting a cap-rate bet, not an operating bet. Common practice: assume exit cap = entry cap + 50bps (cap rate expansion bias), which is conservative.

Typical IRR ranges

• 5–10% IRR — Core / stabilised assets, low leverage. Pension funds and insurance companies operate here.
• 10–15% IRR — Core-plus / stabilised with moderate leverage. Most retail buy-to-let.
• 15–20% IRR — Value-add / mild repositioning. Renovation + lease-up plays.
• 20%+ IRR — Opportunistic / development. Construction or major repositioning, higher execution risk.

These are required returns — what investors demand to take the underlying risk. If your modelled IRR is below the range for the risk class, you're underpaid for the risk.

IRR vs cash-on-cash vs cap rate

• Cap rate — single-year unlevered: NOI ÷ price. Doesn't capture financing or appreciation.
• Cash-on-cash — single-year levered: after-debt-service cash ÷ equity invested. Captures financing but not appreciation or time.
• IRR — full-period levered, includes appreciation, debt amortisation, and the exit. Captures everything but is sensitive to assumptions.
• Equity multiple — total distributions ÷ equity invested. Same data as IRR but ignores time. A 2× multiple in 10 years (7.2% IRR) and 2× in 3 years (26% IRR) look identical here — that's why IRR matters.

Interest-only loans

IO loans defer principal repayment, boosting early-year cash flow at the cost of debt amortisation. Useful for stabilisation periods (year 1–3) where you want to maintain DSCR while NOI is still growing. The model accepts an IO period; after it ends, the loan re-amortises over the remaining term.

Common pitfalls

• Anchoring on a generous exit cap. "It'll trade at a 5% cap when I sell" is an optimistic statement disguised as a calculation input. Default to entry cap + 50bps unless you have specific reasons to expect compression.
• Modelling perfect occupancy. NOI growth should already net out vacancy assumptions. Treating it as pure rent growth produces optimistic NOI trajectories.
• Ignoring CapEx. Major roof replacement in year 6 isn't in NOI — it's a CapEx line. This model accepts it through the NOI input (subtract reserves), but a serious underwriting models out CapEx events explicitly.
• Misreading IRR. IRR is an annual compound return, not "total return over N years." A 15% IRR over 7 years means each dollar of equity has grown to $2.66 (1.15^7), not 1.15. Equity multiple is the easier mental model for that.
• Multiple IRRs. Cash flow streams that change sign more than once (negative in year 4 for a renovation, positive again in year 5) can produce multiple IRR solutions. Newton's method finds one; bisection finds another. For real estate with single sign change, this isn't an issue.
• Refinancing not modelled. Mid-hold refis that return equity to investors can boost IRR dramatically. This model assumes single-loan-to-exit; for refi scenarios, build the cash flow stream manually.
• Pre-tax only. Depreciation deduction, mortgage interest deduction (if applicable), and capital gains tax at exit all materially affect after-tax IRR. The model is pre-tax. Subtract your marginal tax rate × the relevant base for a rough after-tax estimate.

Pairs with

• cap-rate — for the single-year unlevered view.
• noi-calculator — to produce the year-1 NOI input.
• mortgage-affordability-calculator — sanity-check loan terms against the property's DSCR.
• rental-yield — the percentage version of cap rate for European-convention reporting.