Internal Rate of Return (IRR)

A calculation used to estimate the future value of an investment as if it were valued at the present. IRR is a discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis. Fundamentally, IRR and discount rate are similar, but IRR solves for the discount rate whereas the discount rate solves for the present value.

IRR can be used for a variety of investments; in real estate, IRR is an expected return on a property investment given an acquisition price – the expected net cash flows of the property over the holding period including any sales proceeds from the resale of the property at the end of the holding period. It is a good measure of a property’s long-term profitability because it uses annual net cash flow and the change in equity over time.

In private equity, IRR is also known as the breakeven point, which is the point between capital invested and the present value of capital an investment is expected to generate. A higher breakeven point implies a higher expected potential return on an investment.