IRR in real estate: How to calculate and interpret returns

A commercial property can produce several valid IRRs. The building’s cash flows produce a property return; borrowing changes the return to equity; and the partnership’s fees and profit split determine what each investor receives.

The exit price matters just as much as the calculation. A modest change in the assumed sale cap rate can move projected returns substantially, particularly when a loan must be repaid at closing.

This guide works through one investment to show how those inputs affect IRR and how to compare the results.

What is IRR in real estate?

IRR is the discount rate that makes the net present value (NPV) of an investment’s cash flows equal zero. Contributions are negative cash flows. Distributions and net sale proceeds are positive. The calculation accounts for when each occurs.

Formula: 0 = Σ[CF(t) / (1 + r)^t], summed over all periods. CF(t) is the cash flow in period t and r is the IRR. Include the initial investment at t = 0.

For a conventional investment with one initial outflow followed by inflows, IRR can be compared with the investor’s required return. Duke University’s capital-budgeting notes explain why NPV is also useful when comparing projects of different sizes or cash-flow patterns.

IRR describes the cash flows included in the calculation. Reinvesting distributions elsewhere does not change that historical IRR, although the returns earned on those reinvestments change the investor’s total wealth. A modified IRR (MIRR) can make an assumed reinvestment rate explicit.

Use projected IRR for an acquisition forecast and realized IRR for an investment that has fully exited. An interim return may include an estimated remaining value, which should be labeled with its valuation date and basis.

How to calculate IRR on a property

In Excel, use =IRR(values) for equally spaced cash flows or =XIRR(values, dates) for actual transaction dates. Include every contribution and distribution. For a fully exited investment, the final inflow includes sale proceeds after debt repayment and selling costs.

Here is the five-year, 6.5% exit-cap scenario used throughout this guide. All cash flows occur at year-end after the initial investment:

Year	Equity cash flow	What it is
0	($4,000,000)	Equity check
1	$180,000	NOI $700,000 less debt service $520,000
2	$220,000	NOI $740,000 less $520,000
3	$260,000	NOI $780,000 less $520,000
4	$320,000	NOI $840,000 less $520,000
5	$6,226,000	$380,000 of operations plus the $13,846,000 sale less $8,000,000 of principal

Applying =IRR() to the cash-flow column gives approximately 13.5%. Total distributions of about $7.206 million divided by the $4 million investment give a 1.80x equity multiple. Displayed sale figures are rounded to the nearest $1,000; calculations use unrounded amounts.

How the exit cap rate changes IRR

Assume a hypothetical $12 million purchase financed with an $8 million interest-only loan at 6.5% and $4 million of equity. Annual debt service is $520,000. To isolate the effects of financing and the exit price, the model excludes transaction costs, capital expenditures, fees and taxes.

Annual NOI is $700,000, $740,000, $780,000, $840,000 and $900,000. After debt service, operating cash flow totals $1.36 million over five years. The example values the sale using year-five NOI divided by the exit cap rate. In practice, state whether the buyer’s valuation uses trailing or forward NOI and apply that convention consistently.

The following scenarios keep operations and debt unchanged:

Exit cap	Sale price	Equity at sale (plus year-5 cash flow)	IRR to equity	Equity multiple
6.00%	$15,000,000	$7,380,000	17.1%	2.09x
6.50%	$13,846,000	$6,226,000	13.5%	1.80x
7.00%	$12,857,000	$5,237,000	10.1%	1.55x

The entry cap rate is approximately 5.83% ($700,000 ÷ $12 million). All three exit assumptions represent cap-rate expansion from entry. The 6% scenario has the smallest expansion and the highest sale price; the 7% scenario has the largest expansion and the lowest price.

A one-percentage-point increase in the exit cap rate reduces projected equity IRR by about seven percentage points in this example. That sensitivity should be visible alongside the base-case return.

Axios reported the Transamerica Pyramid complex’s $691.6 million sale in March 2026. To assess investor performance from any sale, the analyst also needs the acquisition outlay, subsequent capital spending, financing and dated distributions. A transaction price alone cannot establish IRR.

How the hold period and refinancing affect IRR

Keep the 6.5% exit cap and extend the NOI assumptions to $940,000 in year six and $980,000 in year seven. The table compares sales at different points along that operating plan:

Hold	Sale price at 6.50%	IRR to equity	Equity multiple
3 years	$12,000,000	5.5%	1.17x
4 years	$12,923,000	10.9%	1.48x
5 years	$13,846,000	13.5%	1.80x
7 years	$15,077,000	14.4%	2.33x

In this example, selling earlier produces a lower IRR because the property has had less time to increase NOI. An early exit does not automatically improve annualized performance.

Extending the hold from five to seven years raises IRR from 13.5% to 14.4% and the equity multiple from 1.80x to 2.33x. The investor receives more total cash but commits capital for two additional years.

A higher IRR can mean less money back

A refinance can change the timing without a sale. Suppose an additional $1.5 million of interest-only debt is borrowed and distributed at the end of year three, also at 6.5%. Annual debt service then rises by $97,500 in years four and five, and the additional principal is repaid at sale. Assume no refinancing costs.

Total cash returned falls from approximately $7.206 million to $7.011 million, reducing the equity multiple from 1.80x to 1.75x. IRR nevertheless rises from 13.5% to about 14.4% because a substantial distribution arrives earlier. Identify refinance proceeds separately from operating distributions when explaining this result.

The higher IRR comes with $195,000 less total cash returned, equal to the additional interest paid over the final two years. Earlier access to capital has value, but the cost needs to be visible. When reviewing a proposed refinancing distribution, ask for its source, the change in total expected cash returned and the debt remaining afterward. Present those alongside IRR and the equity multiple so investors can assess whether receiving cash sooner is worth the added borrowing cost and exposure.

Property IRR, equity IRR and LP IRR

Each return measures a different set of cash flows. Label the basis whenever presenting an IRR.

Property IRR uses the $12 million purchase price, NOI and gross sale proceeds, before financing. In the 6.5% exit scenario, it is approximately 9.1%. Equity IRR uses the $4 million equity investment and cash flows after debt service and repayment; it is approximately 13.5% before sponsor fees and promote.

To isolate the waterfall, assume the LP funds all $4 million, the GP contributes no capital, and fees are excluded. The LP receives an 8% simple annual preference on unreturned capital, with unpaid preference carried forward. After capital and preference are paid, the remaining profit splits 80% to the LP and 20% to the GP. With no catch-up, the GP receives about $321,000 at exit and LP IRR is 12.5%. A full catch-up taking the GP to 20% of total profit increases its allocation to about $641,000 and reduces LP IRR to 11.3%.

Borrowing increases the equity return in this scenario. The distribution waterfall then allocates the equity proceeds between the partners. Less favorable operating or exit outcomes can also cause leverage to magnify losses.

A complete investor model must include applicable acquisition, management and disposition fees, as well as transaction costs and capital calls. Show when each fee is paid and which cash-flow level bears it.

The exit assumptions should be supported by the commercial property valuation, while underwriting should test whether the proposed debt remains supportable.

What is a good IRR in real estate?

A suitable target depends on the strategy, financing and investor’s required return. Use the following distinctions when selecting comparable opportunities:

Strategy	Return emphasis	Risk to assess
Core	Current income and preservation of capital	Lease durability and financing exposure
Core-plus	Income with modest operating improvements	Execution costs and tenant rollover
Value-add	Income growth and a successful exit	Renovation, lease-up and sale assumptions
Opportunistic and development	Value creation before stabilized income	Entitlements, construction and funding needs

There is no universal IRR threshold for these categories. Compare targets on the same gross or net basis and over similar hold periods. A 13.5% pre-promote equity IRR and an 11.3% LP IRR describe different returns on the same investment.

Read IRR alongside the equity multiple and cash-on-cash return

IRR captures timing. The equity multiple shows total cash returned relative to invested equity. Operating cash-on-cash return shows annual cash income relative to the stated equity basis.

NPV adds another perspective by expressing value in dollars at a selected discount rate. It is particularly useful when two opportunities require different amounts of capital or when unconventional cash flows make IRR difficult to interpret.

When calculating cash-on-cash return, identify the numerator and equity basis. Separate operating cash flow after debt service from sale proceeds and borrowed refinance distributions so readers can understand recurring income.

Keep forecast and actual returns clearly labeled. If an interim IRR includes a remaining property value, disclose that assumption and distinguish it from cash already distributed.

The same contribution and distribution history should support all investor-level metrics. Reconcile differences in timing, fees and residual value before presenting competing results.

Keeping investor performance reports consistent

Save the acquisition model and its assumptions so later reports can explain changes in operations, financing and expected sale proceeds. Record each contribution and distribution against the correct investor and date.

Agora’s investor reporting presents performance metrics including IRR, cash-on-cash return and equity multiple, alongside investor-specific reports. Teams can use that reporting process to communicate actual results and changes to the original plan.

Conclusion

A useful IRR is one the reader can trace to its cash flows. In this example, changing the exit cap rate moves projected equity IRR from 17.1% to 10.1%, while the distribution terms further affect the LP’s result.

Before comparing returns, confirm the investment period, exit assumptions, financing and treatment of fees. Then review the total cash returned and recurring income alongside the percentage.

Explore Agora’s investor reporting tools for communicating performance across your portfolio.