Internal rate of return
The annualized return on an investment that accounts for timing of all cash flows in and out. Common in syndications and commercial deals. Harder to calculate than cap rate but more complete.
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Why a seller cares
IRR is the return an investor projects across the whole hold, timing included, and it is what a syndicate is chasing when it prices your building. A sponsor targeting a 15% IRR has a maximum price, and it is in their model.
Part 2 of 4
A simple example
A buyer models your building: $250,000 down, $18,000 a year of cash flow, and a sale in year five. Their spreadsheet says 14% IRR at your price and 16% at $40,000 less.
| What moves the IRR | How |
|---|---|
| The purchase price | Lower price, higher IRR |
| The exit cap rate | A lower exit cap, a higher IRR |
| How soon cash comes back | Earlier is better; IRR rewards timing |
IRR is the whole deal in one percentage, and the price you are offered is the one that hits it.
Part 3 of 4
What people get wrong
That IRR is the yearly cash return. It folds in the sale and the timing, which is why it can look high on a building that pays little each year.
Part 4 of 4 · where to read next
Where it appears in the sale
What a definition is, and what it isn't
Keighbor is a software company, not a law firm, brokerage, or tax adviser. This is general information, not legal, tax, financial, or real estate advice about your sale. Your situation may differ. Before acting on a contract, disclosure, title, tax, or pricing question, ask an appropriately licensed professional in your state.
Written and researched by Keighbor Research · drawn from the reference glossary · how we research and check what we publish
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