What Is a Good IRR for Real Estate?

What is a good IRR for real estate depends on the risk you took, the hold period, and whether debt did the work. Internal rate of return is the discount rate that sets the net present value of every cash flow, including the eventual sale, to zero. It is not this year’s cash-on-cash return, and it is not a cap rate. A levered IRR of 11 percent can be a solid result on a stable rental or a disappointing result on a risky plan that only works if you sell at a richer price. Anyone who quotes a single “good” IRR for all property is selling a benchmark without a building.

Illustrations are not a rate quote, a target we will hit, or an approval. An inquiry is not an application.

What Is a Good IRR for Real Estate on a Real Hold Period

IRR answers a narrow math question. If you invest cash, collect annual cash flow, and later get a sale or refinance proceeds, what annual rate makes those future dollars equal the cash you put in today? Treasury yields in the Federal Reserve H.15 release are one public yardstick for the return you could have earned without a tenant, a roof, or illiquidity. A property IRR that does not clear a safe yield by a margin you respect is not a “good” IRR. It is a complicated way to take more risk for the same money.

Here is a complete illustration. You invest $100,000 of equity. The property sends you $8,000 at the end of each year for five years. At the end of year five you also receive $120,000 from a sale after paying off the loan, so the year-five cash flow is $128,000. The IRR of that series is about 11.2 percent. Cash-on-cash in the same illustration is $8,000 ÷ $100,000 = 8 percent. The IRR is higher than cash-on-cash because the sale returned more equity than you put in. If the sale had only returned the $100,000, the IRR would collapse toward the 8 percent cash yield. Spreadsheets that show a glamorous IRR are usually assuming that sale. Read the sale before you applaud the percent.

That is why “a good IRR” cannot be one national number.

• A stabilized rental with modest leverage might be underwritten in the high single digits to low teens and still be rational if the income is real and the sale assumption is boring.
• A value-add plan that shows 18 or 20 percent usually buried a rent increase, a cap-rate compression, or both. If those fail, the realized IRR can land near the cash yield or below it.
• A short hold magnifies the sale. A ten-year hold magnifies whether the annual cash existed. The same property can post a pretty IRR on a three-year flip assumption and a plain IRR on a decade of collecting rent.

Compare IRR with what a good cash-on-cash return looks like and with cap rate versus cash-on-cash. Cap rate ignores your loan and your exit. Cash-on-cash ignores the exit and principal paydown. IRR tries to include all timed cash flows. None of the three replaces the other. A good decision usually shows all three, with the sale price written in dollars, not hidden inside the IRR cell.

Unlevered IRR and Levered IRR Are Different Deals

Unlevered IRR pretends you paid cash. It tells you what the building did. Levered IRR uses only the equity you invested and the cash left after debt service, and it includes sale proceeds after the loan payoff. Leverage raises levered IRR when the property earns more than the debt costs, and it cuts levered IRR when you are in negative leverage or when a high constant eats the cash you needed the IRR to count.

A worked warning: the 11.2 percent illustration assumed the $8,000 showed up every year and the sale netted $120,000 to you. Cut the annual cash to $4,000 because taxes, a vacancy, or a rate reset took the rest, and keep the same $120,000 sale. The IRR falls, and it falls more if the sale also disappoints. Debt did not create income. It changed how much of the income you kept and how sensitive the percent is to a bad year. Cash flow versus appreciation is the same split in words. IRR just forces a date on the appreciation.

Fees belong in the first cash flow. Points, closing costs, and a repair you pay at purchase increase the equity check. Investors compute IRR on the down payment alone and call the extra costs “outside the deal.” Those costs were inside the deal. Put them in year zero or stop quoting the IRR.

Taxes change the realized number again. Depreciation can shield income and then reappear as recapture at sale. A pre-tax IRR and an after-tax IRR are both legitimate if you label them. A pre-tax IRR presented as money you keep is not. This page is not tax advice. Have a preparer run the sale year before you rank two properties by a pre-tax IRR that ignores the gain.

Where Spreadsheets Quietly Cheat

The usual cheats are easy to spot once you list the assumptions under the percent.

Sale cap rate. Buying at a 7 percent cap and selling at a 5 percent cap in year five is a market gift. It may happen. It is not a property skill. Run the IRR again at the same cap rate you bought at, and at a wider one. If “good” disappears, the IRR was a cap-rate trade.

Rent growth every year, including year one. In-place rent is not growth. Growth starts when a lease allows it. A vacant unit does not grow. It leases or it does not.

No capital expenditures. A roof in year four is a cash flow. Leaving it out of the IRR is how a 12 percent return becomes a 12 percent return plus a special assessment you pay from “somewhere else.”

Refinance as if it were profit. A cash-out refinance returns loan proceeds, which you must pay back, and it does not end the deal. Putting refi cash into an IRR and ignoring the remaining debt and the later sale double-counts. If you use a refinance in the model, keep the new payment and a real exit.

A hold period that matches the prettiest IRR. If you would not sell in year three, do not underwrite year three because the IRR peaks there. Match the model to the loan term and to your life. A balloon in year five is a real exit whether you wanted one or not.

How to Use IRR Without Worshipping It

Pick a hurdle that means something to you: a Treasury yield from a public series such as H.15, plus a premium for leverage, illiquidity, and the chance the rent is wrong. If a boring stabilized model clears that hurdle with a same-cap-rate sale, the IRR is good enough to keep studying the building. If it clears the hurdle only with a lower sale cap rate or perfect occupancy, it is not good yet. It is incomplete.

Then ask whether the financing matches the hold. A business-purpose rental or commercial loan that balloons inside the IRR window means the IRR assumes a refinance or a sale you do not control. Model the payoff. A long fixed payment can make a lower IRR safer than a higher IRR that requires the market to cooperate in year five. Safety is allowed to win.

Do not compare your levered IRR on a duplex with a sponsor’s promoted IRR on a syndication after fees. The percents are not the same stack of cash flows. Compare equity in, cash each year, and cash at exit, in dollars, then let IRR summarize. If you cannot explain the dollars, ignore the percent.

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Frequently Asked Questions

Is a 15 percent IRR good?

Sometimes, on a risky plan where you might also earn much less. On a stabilized leased building, that figure often assumes rent growth or a richer sale cap rate than you paid. Recompute with flat rents and the same exit cap rate before you trust it.

Why is my cash-on-cash lower than my IRR?

Cash-on-cash is one year’s cash flow divided by cash invested, while IRR also includes later years and the sale. In the illustration, an 8 percent cash yield sat inside an IRR near 11 percent because the sale returned a gain. If there is no gain at exit, the two figures move closer together.

Should I chase the highest IRR in the model?

No. The highest figure is often the shortest hold or the most aggressive sale price. Choose the hold you will actually live with, then compare returns on that same timeline. A slightly lower IRR with a fixed loan and real reserves can be the better investment.

Does IRR include the loan?

Only if you built a levered IRR. Unlevered IRR assumes an all-cash purchase and shows what the asset did, while levered IRR uses equity in and cash after debt. Label which one you are reading so you do not compare different stacks.

Will a good projected IRR guarantee financing?

No. Lenders test rent or net operating income against the payment, plus value, reserves, and the property. They do not fund a target IRR, and this page does not quote rates or promise approval. Bring the price, the income, and the hold you are actually modeling.