IRR (Internal Rate of Return)
En español: Tasa interna de retorno (TIR, IRR)
The internal rate of return is the annual rate at which an investment's cash flows, in and out, exactly balance. It is the one measure that accounts for WHEN money arrives as well as how much of it does, which is why institutions underwrite to it and why it can be engineered.
- It is a rate, so time is inside it. Money returned sooner raises it even if the total returned never changes.
- It is highly sensitive to the exit price, which is an assumption. Most of a projected IRR is usually made on the last day of the model.
- It assumes distributions are reinvested at the same rate, which is rarely true and quietly flatters long holds.
- Read it beside the equity multiple. One says how fast, the other how much, and a deal needs both answers.
The same purchase and the same five-year hold: $587,500 in, the cash flow it produced, and the net proceeds at sale.
The same deal reads 1.22x as a multiple and 4.3% as a rate. Neither is wrong; the rate is the one that says whether the years were worth it.
Related terms
All termsEquity Multiple
The equity multiple is every dollar returned to the investor divided by every dollar he put in, across the whole hold: operating cash flow plus what is left after the sale pays off the loan and its costs.
InvestmentCash-on-Cash Return
Cash-on-cash return is the cash a property puts in the owner's pocket in a year, divided by the cash he actually put into it.
InvestmentExit Cap Rate
The exit cap rate is the capitalization rate assumed when a projection sells the property at the end of the hold.
Terms arrive with the writing.
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