What Is a Good IRR for Real Estate?
When evaluating a real estate investment, one of the most common metrics investors look at is IRR, or Internal Rate of Return. It’s a key measure of how efficiently an investment is expected to grow over time.
But what exactly does IRR represent—and what’s considered a “good” IRR in real estate? Let’s break it down.
Understanding IRR in Real Estate
IRR (Internal Rate of Return) is a financial metric used to estimate the annualized return an investor can expect from an investment, factoring in both cash flow and appreciation over time.
In simple terms, IRR is the discount rate that makes the net present value (NPV) of all future cash flows equal to zero.
Unlike cash-on-cash return, which measures current income, IRR captures the time value of money—meaning it accounts for when returns are received. A higher IRR indicates the investment generates stronger returns sooner, rather than later.
How IRR Works
Here’s an example:
An investor purchases a property for $1 million and expects to sell it for $1.5 million after five years, earning $50,000 per year in net rental income. The IRR calculates the rate at which those annual returns—and the eventual sale profit—equal the original investment amount.
If the resulting IRR is 15%, it means the property’s cash flows and appreciation together produce an average annual return of 15%, accounting for timing and compounding.
What Is a “Good” IRR in Real Estate?
There’s no one-size-fits-all number—what’s considered a “good” IRR depends on the type of investment, market conditions, and risk level.
Generally speaking:
Core assets (low risk): 8%–12% IRR
Examples: stabilized multifamily or retail properties with long-term tenants
Value-add investments (moderate risk): 13%–17% IRR
Examples: underperforming properties improved through renovations or leasing
Opportunistic or development projects (higher risk): 18%–25%+ IRR
Examples: ground-up developments or repositioning projects
These ranges serve as general benchmarks—investors should weigh risk, holding period, leverage, and market volatility when interpreting IRR.
Why IRR Isn’t the Only Metric That Matters
While IRR is a powerful tool, it shouldn’t be the sole deciding factor. It’s based on assumptions about timing, rent growth, and exit values, all of which can change.
Other key metrics to review include:
Equity Multiple: Total cash returned divided by cash invested.
Cash-on-Cash Return: Annual cash flow as a percentage of invested equity.
Cap Rate: A snapshot of property yield at purchase or sale.
Together, these metrics provide a fuller picture of a property’s performance and risk profile.
Factors That Influence IRR
Several variables can significantly impact an investment’s IRR:
Purchase price and financing terms
Rental income and operating expenses
Market appreciation or depreciation
Timing of capital improvements
Exit strategy and sale timing
Small changes in these inputs—such as a delayed sale or lower rent growth—can move IRR up or down substantially.
Final Thoughts
A “good” IRR is one that aligns with your investment goals, timeline, and risk tolerance. For conservative investors, an 8–12% IRR from stable assets may be ideal. For others willing to take on higher risk, targeting returns in the high teens or low 20s may make sense.
As with any investment decision, it’s important to look beyond a single metric and consider the property’s fundamentals, sponsor track record, and market conditions before moving forward.
