How IRR Works for a Rental Property
A rental pays you three ways: monthly cash flow, a loan balance your tenants pay down, and appreciation you collect when you sell. The cash-on-cash calculator and cap rate calculator only see year one. IRR puts all three together and adjusts for timing, so you can compare deals with different hold periods on one number.
IRR Formula
0 = −Cash Invested + CF₁ ÷ (1 + IRR) + CF₂ ÷ (1 + IRR)² + … + (CFₙ + Sale Proceeds) ÷ (1 + IRR)ⁿ
Equity Multiple = (Total Cash Flow + Net Sale Proceeds) ÷ Cash Invested
There is no closed-form solution, so the calculator finds the rate numerically.
Worked Example
- Buy a $250,000 rental with 25% down and 3% closing costs: $70,000 invested.
- A 7%, 30-year loan on $187,500 costs about $1,247/month.
- Rent is $2,200 with 5% vacancy and $650/month of expenses, both growing 3% a year. Year 1 NOI is $17,280 and cash flow is about $2,311 (3.3% cash-on-cash).
- After 5 years at 3% appreciation it sells for about $289,819. After 6% selling costs and paying off the remaining loan of about $176,497, you keep about $95,933.
- With $16,895 of cash flow over the five years, you get back $112,828 on $70,000: an IRR of about 10.7% and a 1.61x equity multiple.
Notice the year-one cash-on-cash return is only 3.3%, but the IRR is over 10% because loan paydown and appreciation show up at the sale. When you do sell, the 1031 exchange calculator shows how much tax you could defer by rolling the gain into your next property.
IRR vs. Other Return Metrics
- Cap rate: NOI ÷ price. Ignores financing and the sale. Best for comparing properties.
- Cash-on-cash return: One year of cash flow ÷ cash invested. Best for income.
- IRR: Every cash flow plus the sale, adjusted for timing. Best for comparing whole deals.
- Equity multiple: Total cash back ÷ cash invested. Shows size of the win, not speed.