The internal rate of return (IRR) is the most quoted number in syndication and fund offerings, and one of the easiest to misread. This guide defines IRR precisely, works through complete examples with the spreadsheet formulas and results, shows how to annualize monthly and irregular cash flows, and sets out a practical checklist for grading a projected IRR. It is part of our investment grade research on net lease and income property. For how credit quality is rated, see the investment grade guide.
What IRR Measures
IRR is the discount rate at which the net present value (NPV) of an investment’s cash flows equals zero. It is a money-weighted return: because it is solved from the actual amounts and dates of money going in and coming out, the size and timing of each contribution and distribution affect the result. That is different from a time-weighted return, which removes the effect of investor cash flows and is used to evaluate managers of public portfolios.
0 = CF0 + CF1/(1+r) + CF2/(1+r)2 + … + CFn/(1+r)n
Here CF0 is the initial investment (a negative number), each later CF is the net cash flow for that period, and r is the IRR. There is no closed-form solution for most cash-flow patterns, so spreadsheets solve for r by iteration.
Which cash flows are inflows and which are outflows
- Outflows (negative): the purchase price or equity contribution, closing costs, capital calls, and any capital improvements you fund.
- Inflows (positive): rent or distributions you receive and the net sale proceeds you receive when the property is sold, after selling costs and loan payoff.
Operating expenses and property taxes only enter the calculation directly if you pay them yourself. In a net lease, the tenant usually pays them, so the landlord’s cash flow is the net rent.
Worked Example: A Five-Year Net Lease Hold
An investor buys a single-tenant net lease property for $1,000,000 with no debt. Year one net rent is $65,000 (a 6.50% going-in cap rate) and rises 2% a year. At the end of year five the property sells at a 6.50% cap rate on year-six rent of $71,765, a gross price of $1,104,081. After 2% selling costs, net sale proceeds are $1,081,999.
| Year | Cash flow | Notes |
|---|---|---|
| 0 | −$1,000,000 | Purchase at a 6.50% cap rate, all cash |
| 1 | $65,000 | Net rent |
| 2 | $66,300 | 2% annual rent increase |
| 3 | $67,626 | |
| 4 | $68,979 | |
| 5 | $1,152,357 | Net rent of $70,358 plus net sale proceeds of $1,081,999 |
Entering these six cash flows in cells B2:B7 and using =IRR(B2:B7) returns 8.14%. Total cash received is $1,420,262, an equity multiple of 1.42x. Discounted at the IRR, the sale accounts for about 73% of the present value of everything the investor receives, which is why the exit assumption matters so much.
How the exit cap rate moves the result
| Exit cap rate | Net sale proceeds | IRR | Equity multiple |
|---|---|---|---|
| 6.00% | $1,172,166 | 9.58% | 1.51x |
| 6.50% (same as entry) | $1,081,999 | 8.14% | 1.42x |
| 7.00% | $1,004,714 | 6.83% | 1.34x |
A half-point change in the exit cap rate moves the IRR by roughly 1.3 to 1.4 percentage points in this example, with the rent unchanged. A projection that assumes a lower exit cap rate than the entry cap rate is assuming the market will pay more for the same income, and much of the projected return comes from that assumption rather than from the property. For context, the median asking cap rate across the net lease listings we track is 6.35% as of October 19, 2026; see NNN cap rates for detail.
IRR vs. Equity Multiple
Compare Deal A above with Deal B: $1,000,000 invested, no distributions, and a sale for $1,300,000 net at the end of year three.
| Deal A (5-year net lease) | Deal B (3-year value-add) | |
|---|---|---|
| IRR | 8.14% | 9.14% |
| Equity multiple | 1.42x | 1.30x |
| Total profit | $420,262 | $300,000 |
| Cash received before sale | $338,263 | $0 |
Deal B has the higher IRR but earns less money and pays nothing until the sale. IRR tells you how fast money grew while it was invested; the equity multiple tells you how much it grew. Read them together, along with the hold period and the risk of each business plan.
Annualizing IRR: Monthly, Quarterly and Irregular Cash Flows
The spreadsheet IRR function returns a rate per period, where the period is whatever interval separates your cash flows. With annual cash flows, the result is already an annual rate and needs no further adjustment. With monthly or quarterly cash flows, convert it:
- Monthly:
=(1+IRR(range))^12-1 - Quarterly:
=(1+IRR(range))^4-1 - Irregular dates:
=XIRR(values, dates), which returns an annualized rate directly using the actual number of days between cash flows.
Worked example: an 18-month investment
An investor puts in $100,000 and receives $125,000 eighteen months later. With 19 monthly cash flows (−100,000, then seventeen zeros, then 125,000), =IRR(range) returns 1.2474% per month. Annualized, =(1+1.2474%)^12-1 gives 16.04%, the same as 1.2512/18 − 1. Using XIRR with dates of January 1, 2025 and July 1, 2026 (546 days) gives 16.09%; the small difference comes from counting actual days rather than equal months.
Be careful with offering materials that quote a return without saying what it is. A 15% total return earned over 18 months is an annualized rate of 1.1512/18 − 1, or 9.77%, not 15%. A 15% IRR is already annualized and should not be adjusted again.
The Reinvestment Question and MIRR
IRR is often said to “assume” that distributions are reinvested at the IRR. More precisely, the IRR is a property of the cash flows themselves and is correct as a description of the investment whatever you do with the distributions. But your own wealth only compounds at that rate if you can reinvest the distributions at that same rate. When interim cash flows are large or the IRR is high, that may not be realistic.
The modified internal rate of return (MIRR) lets you set the reinvestment rate. In Excel, =MIRR(values, finance_rate, reinvest_rate). For Deal A, reinvesting the rent at 4% gives an MIRR of 7.68%, compared with the 8.14% IRR. For comparison, the 10-year Treasury yield is 5.24% and the ICE BofA US Corporate Index (investment grade) yields 5.99% as of October 1, 2026.
How to Grade a Projected IRR
There is no published standard that assigns letter grades to IRRs, and target returns change with interest rates, so we do not use fixed thresholds. Instead, test each projection against these questions:
- What would a lower-risk alternative pay? Compare the projected IRR with the 10-year Treasury (5.24%) and investment grade corporate bonds (5.99%). The gap is the compensation for illiquidity, leverage, and property risk.
- Levered or unlevered? Debt raises IRR when the property earns more than the loan costs, and magnifies losses when it does not. Compare levered IRRs only with other levered IRRs.
- Before or after fees and promote? Investor IRR in a syndication or fund is net of the sponsor’s fees and share of profits; property-level IRR is not. Make sure you are comparing the same measure.
- Exit cap rate vs. entry cap rate. An exit cap rate at or above the entry cap rate is the conservative case. Ask for the IRR at a higher exit cap rate.
- How much comes from the sale? The larger the share of value that depends on the sale, the more the IRR depends on market conditions years from now.
- Equity multiple and hold period. A high IRR with a low multiple can mean a short hold with a small profit.
- Rent assumptions. For net lease property, check the tenant’s credit in the tenant ratings database, and whether the lease term covers the hold period. Rent growth beyond the lease’s contractual increases is an assumption.
- Track record. Ask the sponsor for projected versus realized IRRs on prior, fully exited deals.
Comparing a Syndication with Direct Ownership?
We can model the cash flows of a net lease property you are considering, including exit cap rate sensitivity, so you can compare it with other offerings on the same basis. On the majority of transactions, there is no separate fee to you as the buyer for representation; the listing broker pays a cooperating commission.
Frequently Asked Questions
What is IRR in a real estate investment?
IRR is the discount rate at which the net present value of all of an investment’s cash flows equals zero. It is a money-weighted return, so the size and timing of each contribution and distribution affect the result.
Is IRR a time-weighted return?
No. IRR is a money-weighted return. A time-weighted return removes the effect of when investors add or withdraw money and is used to evaluate portfolio managers; IRR includes those effects.
Are sale proceeds an inflow or an outflow in an IRR calculation?
Net sale proceeds received by the investor are an inflow and are entered as a positive number. The purchase price, capital calls, and costs you pay are outflows.
How do you annualize a monthly IRR?
Use (1 + monthly IRR)12 − 1. For example, a monthly IRR of 1.2474% annualizes to 16.04%. For cash flows on irregular dates, use XIRR, which returns an annualized rate directly.
Why can a high IRR be misleading?
IRR rewards speed as much as profit. A short hold can show a higher IRR than a longer hold that earns more money, as in the Deal A and Deal B example above. Read IRR alongside the equity multiple and hold period.
Which assumption moves a projected IRR the most?
In most real estate projections, the exit cap rate. In the five-year example on this page, a half-point change in the exit cap rate moves the IRR by about 1.3 to 1.4 percentage points.
Educational content only. InvestmentGrade.com is a commercial real estate brokerage and educational publisher. We do not sell, broker, underwrite, or solicit any bonds, securities, or investment products. Yields, ratings, and prices referenced fluctuate continuously and are sourced from public market data as of the date noted. Nothing on this page constitutes investment advice, an offer to sell, or a solicitation to buy any security. Consult a licensed broker-dealer, registered investment advisor, or tax professional before making any investment decision. For SEC investor education, visit investor.gov.
