12/22/2025
What is IRR in commercial real estate?
I teach this in my training to our residential agents and it is sometimes confusing.
Explained Clearly:
IRR (Internal Rate of Return) shows the annual compounded return an investor earns over the entire life of an investment, including cash flow and the sale.
It converts different cash flows over time into one comparable annual percentage.
• Includes annual cash flow
• Includes sale proceeds
• Accounts for how long the investment is held
• Allows comparison across different asset types
Plain English:
IRR answers this question:
“If I invest money here, how does this perform compared to everything else I could do with my capital?”
IRR allows investors to compare apples to oranges:
• Real estate vs stocks
• One property vs another
• Short holds vs long holds
Everything gets converted into the same annual return metric, creating an even evaluation.
Simple Example - Not precise just an example of the concept:
An investor purchases a property for $1,000,000.
Cash flows:
• Year 0: –$1,000,000
• Years 1–4: +$80,000 per year
• Year 5: +$80,000 cash flow + $1,200,000 sale
Total Year 5 inflow: $1,280,000
The single annual return that correctly matches the amount and timing of these cash flows is:
IRR ≈ 11.2%
Why investors use it:
Cap rate measures income today.
IRR measures investment performance over time and how it stacks up against other opportunities for capital.
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Footnote:
IRR can be calculated with or without financing. This example reflects a no-debt (unlevered) return. Using leverage changes the IRR by amplifying both gains and losses.
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Nathan Bragg
Managing Director, RE/MAX Commercial – RE/MAX Time Realty
Top 100 U.S. RE/MAX Commercial Brokers 2023–24
909-210-3175
REMAXTimeCommercial.com
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