How to use the real estate IRR calculator
The Hold and sell tab builds the cash flows for you from a handful of deal inputs:
- Purchase price and closing costs. Closing costs are the title, legal, lender and inspection fees paid in cash at purchase. They are part of your equity and part of the unlevered cost.
- Loan. Enter it as a loan-to-value percentage of the price or as a dollar amount, then the interest rate and the amortization period. Set the loan to 0 for an all-cash purchase.
- Year-1 net operating income and its growth. NOI is the rent you collect after vacancy, minus operating expenses such as property tax, insurance, repairs and management. It excludes the mortgage. A rental property calculator or the seller’s operating statement gives you the starting figure.
- Holding period, exit cap rate and selling costs. The sale price is the following year’s NOI divided by the exit cap rate, because that is the income a buyer is paying for.
The Custom cash flows tab is for deals that do not fit that pattern: a renovation with a large capital outlay in year 2, a refinance that returns cash, or the distributions from a syndication. Enter one row per year, starting with the investment as a negative number, and the discount and MIRR rates.
How real estate IRR is calculated
The internal rate of return is the annual discount rate at which the present value of everything you receive equals what you put in:
The pieces of the hold-and-sell model are:
Sale price = NOIn+1 ÷ exit cap rate
S = Sale price × (1 − selling cost %) − loan balance
Equity multiple = (ΣCFt + S) ÷ EDebt service is twelve monthly payments on a fully amortizing loan. The unlevered IRR uses the same formula with E replaced by price + closing costs, CFt by NOIt, and no loan balance deducted at sale.
There is no closed-form solution, so the calculator finds the rate numerically. For the custom tab, the modified IRR replaces the single unknown rate with two rates you choose:
A worked example
You buy a small apartment building for $850,000 with $17,000 of closing costs and a 70% loan of $595,000 at 6.5%, amortized over 30 years. That leaves $272,000 of your own money in the deal.
The building earns $56,000 of NOI in year 1, a purchase cap rate of 6.59%. Debt service is $45,130 a year, so year-1 cash flow is $10,870, a cash-on-cash return of 4.00%. With NOI growing 3% a year, cash flow rises steadily and averages 5.94% of equity.
After 7 years, a buyer pays for the next year’s NOI of $68,873 at a 6.75% cap: $1,020,340. Selling costs of $51,017 and the $537,977 loan payoff leave $431,346 for you.
In total you receive $544,536 for $272,000 invested, an equity multiple of 2.00× and a levered IRR of 11.55%. The property alone, bought with cash, would return 8.31%.
Leverage: when the mortgage helps and when it hurts
Debt raises the return on equity only when the property earns more than the loan costs. In the example the unlevered IRR of 8.31% beats the 6.5% rate, so leverage adds 3.23 percentage points to the return. Notice that it does so even though the year-1 cash-on-cash return of 4.00% is below the 6.59% cap rate. The payments are high in the early years, but each one also repays principal, and NOI growth plus the sale do the rest.
| Version of the deal | Levered IRR | Equity multiple | Year-1 cash-on-cash |
|---|---|---|---|
| The example (70% loan) | 11.55% | 2.00× | 4.00% |
| All cash | 8.31% | 1.61× | 6.46% |
| Loan rate 7.5% | 9.82% | 1.85× | 2.23% |
| NOI growth 1% instead of 3% | 6.10% | 1.45× | 4.00% |
The last row is the warning. With slower growth the property’s own return falls to 6.34%, below the loan rate, and the levered IRR drops to 6.10%: the mortgage now takes more than it gives. Leverage magnifies whatever the property does, in both directions.
What moves the IRR most
In a hold-and-sell deal, the sale usually dominates. That puts the exit cap rate at the top of the list. Each quarter point matters because it is applied to the whole value of the building:
| Exit cap rate | Levered IRR | Total profit |
|---|---|---|
| 6.25% | 13.78% | $350,082 |
| 6.75% (the example) | 11.55% | $272,536 |
| 7.5% | 8.28% | $175,604 |
A common discipline is to assume an exit cap at or a little above the purchase cap, so the return does not rely on the market paying more per dollar of income in the future. The calculator warns you when your exit cap is below the purchase cap.
The holding period changes the answer too. Closing and selling costs are paid once, so a short hold has to absorb them quickly. Selling after three years returns only 6.38%, while a twelve-year hold returns 12.36%.
Why the equity multiple matters alongside IRR
IRR measures speed; the equity multiple measures size. A deal that doubles your money in two years has a far higher IRR than one that triples it in twelve, but the second puts more dollars in your pocket. In the example, holding for twelve years instead of seven lifts the IRR less than a point, from 11.55% to 12.36%, while the multiple rises from 2.00× to 3.30× and total profit more than doubles to $626,776.
IRR also ignores what you do with cash between distributions. A high IRR on a short deal is only valuable if you can redeploy the money at a similar return. That is why sponsors and lenders quote both figures, and why a deal with a strong IRR but a multiple close to 1.0× deserves a closer look.
IRR pitfalls to watch for
Multiple IRRs. When cash flows change sign more than once, for example a purchase, then a large cash-out refinance, then a capital call for a new roof, the equation can have more than one solution. Enter such a deal in the custom tab and the calculator lists every rate it finds. In a three-year example of −$100,000, +$230,000 and −$132,000, NPV is zero at both 10.00% and 20.00%, yet the equity multiple is 0.99×: you get back less than you put in. Neither IRR describes that deal; NPV at your required return (-$206 at 8%) does.
The reinvestment assumption. Comparing projects by IRR implicitly treats interim cash as if it earned the IRR until the end. If you can only earn 5% on it, the MIRR of 10.19% is a more honest figure than the IRR of 10.74%. Set the reinvestment rate equal to the IRR and the two match: 10.74%.
Back-loaded returns. An IRR that depends mostly on the sale is an IRR that depends mostly on one assumption made years ahead. Check how much of the total comes from operations.
What this calculator does not include
- Income tax and depreciation. Returns are before tax. Depreciation, interest deductions and capital gains or depreciation recapture at sale can change after-tax returns considerably.
- Capital expenditures and reserves, unless you have already deducted them from NOI. Roofs, HVAC and unit turns are real cash costs.
- Refinancing, interest-only periods and balloon terms in the hold-and-sell tab. Use the custom tab to model these with your own cash flows.
- Exact timing. Cash flows are treated as yearly and evenly spaced, and the sale happens at the end of the final year. Monthly timing would give a slightly different IRR.
The results are projections from your assumptions, not forecasts. Test a range of exit cap rates, growth rates and holding periods before relying on a single figure.