Internal Rate of Return

IRR is the gold standard for measuring investment performance in commercial real estate because it captures the full picture: acquisition costs, annual operating cash flows, refinancing proceeds, capital expenditures, and the eventual sale. Unlike cap rate or cash-on-cash return, which are single-year snapshots, IRR reflects the time value of money and rewards investments that generate returns sooner rather than later.

A typical value-add multifamily deal might target a 15-18% levered IRR over a 3-5 year hold period, while a stabilized core asset might target 7-10%. These benchmarks vary significantly by asset type, risk profile, market conditions, and leverage. It is important to compare IRR targets to the risk-free rate and other available investments to assess whether the risk premium is adequate.

IRR has several important limitations. It assumes that interim cash flows can be reinvested at the same IRR, which is often unrealistic. It is also highly sensitive to the projected exit cap rate and sale price, which are inherently speculative. A small change in the assumed exit cap rate can swing the IRR by several percentage points. For this reason, investors should always run sensitivity analysis across a range of exit scenarios and pair IRR with the equity multiple (total profit / total equity invested) to get a more complete picture of absolute returns.