**Contents**show

## What does IRR tell you in real estate?

Internal Rate of Return (IRR) is a metric that **tells investors the average annual return they have either realized or can expect to realize from a real estate investment over time**, expressed as a percentage. … Similarly, every investment has a trade-off, or opportunity cost.

## Why IRR is required?

The internal rate of return (IRR) rule states that a project or investment should be pursued **if its IRR is greater than the minimum required rate of return**, also known as the hurdle rate. The IRR Rule helps companies decide whether or not to proceed with a project.

## What does the IRR tell you?

The IRR indicates **the annualized rate of return for a given investment**—no matter how far into the future—and a given expected future cash flow. … The IRR is the rate at which those future cash flows can be discounted to equal $100,000.

## What does a 20% IRR mean?

If you were basing your decision on IRR, you might favor the 20% IRR project. … IRR assumes **future cash flows from a project are reinvested at** the IRR, not at the company’s cost of capital, and therefore doesn’t tie as accurately to cost of capital and time value of money as NPV does.

## Is IRR the same as cap rate?

In commercial real estate, cap rate is the **preferred measurement of value**. Cap rate is used to calculate return on investment dollars, value or net income, whereas IRR tells the investor potential yield over the holding period.

## What is the difference between cash on cash and IRR?

The biggest difference between the cash on cash return and IRR is that the **cash on cash return only takes into account cash flow from a single year**, whereas the IRR takes into account all cash flows during the entire holding period.

## What is a strong IRR?

For example, a good IRR in real estate is **generally 18% or above**, but maybe a real estate investment has an IRR of 20%. If the company’s cost of capital is 22%, then the investment won’t add value to the company. The IRR is always compared to the cost of capital, as well as to industry averages.

## Why is IRR so popular?

The IRR method **simplifies projects** to a single number that management can use to determine whether or not a project is economically viable. A company may want to go ahead with a project if the IRR is calculated to be more than the company’s required rate of return or it shows a net gain over a period of time.

## What makes a good IRR?

So, assuming the IRR in question is that measured as of the end of the investment timeline, a “good” IRR is **one that you feel reflects a sufficient risk-adjusted return on your cash investment given the nature of the investment**.