How to Calculate IRR on a Rental Property (With Example)

How to calculate IRR on a rental property

To calculate IRR on a rental property, you list every cash flow the deal produces — your upfront cash invested (a negative number), each year of annual cash flow, and the net proceeds when you sell — then solve for the discount rate that makes the present value of all those cash flows equal to zero. That rate is your internal rate of return (IRR). In practice you don't solve it by hand; you use the IRR or XIRR function in a spreadsheet or an analysis tool that models the full hold.

IRR matters because it's the one return metric that accounts for both timing and total return. Cash-on-cash tells you about year one. Cap rate ignores financing and appreciation entirely. IRR captures cash flow, principal paydown, appreciation, and the eventual sale — and it penalizes returns that arrive later. That makes it the closest thing to how institutional buyers actually compare deals.

What IRR actually measures

Think of IRR as the annualized, compounding rate of return on the money you have tied up in the deal, for as long as it's tied up. A 15% IRR means your invested capital effectively grew at 15% per year across the hold, once you account for when every dollar came in and went out.

Three inputs drive it:

• Initial equity outlay — down payment, closing costs, and any rehab you fund out of pocket.
• Annual after-debt cash flow — NOI minus your mortgage payment, year by year. If you're shaky on the operating side, review how to calculate rental property cash flow first.
• Net sale proceeds — projected sale price minus selling costs and remaining loan balance in your exit year.

The IRR formula, in plain English

The textbook formula sets net present value to zero:

0 = CF0 + CF1/(1+IRR) + CF2/(1+IRR)² + ... + CFn/(1+IRR)ⁿ

Where CF0 is your initial investment (negative) and CF1 through CFn are the cash flows in each year, with the final year including your sale proceeds. There's no clean algebraic solution — the software iterates until it finds the rate that balances the equation. Your job isn't the math; it's feeding it honest, well-researched numbers.

A worked 5-year example

Take a $250,000 single-family rental with 25% down:

• Purchase price: $250,000
• Down payment (25%): $62,500
• Closing costs: $6,000
• Initial cash invested (Year 0): -$68,500

Assume it produces $4,800 in after-debt cash flow in Year 1, growing modestly as rents outpace expenses:

• Year 1: +$4,800
• Year 2: +$5,100
• Year 3: +$5,400
• Year 4: +$5,700
• Year 5: +$6,000 (plus sale)

Now the exit. Assume 3% annual appreciation, so the property is worth roughly $289,800 in Year 5. Subtract 7% selling costs ($20,300) and the remaining loan balance (~$172,000 after five years of paydown on the ~$187,500 loan). Net sale proceeds land near $97,500.

So Year 5's total cash flow is $6,000 + $97,500 = +$103,500.

Drop this stream into =IRR():

-68,500 | 4,800 | 5,100 | 5,400 | 5,700 | 103,500

The IRR comes out to roughly 14.5%. Notice how much of that return lives in the exit year — principal paydown and appreciation, not cash flow. That's the point IRR makes that other metrics miss, and it's the core of total-return thinking for buy-and-hold.

Use XIRR when dates aren't annual

IRR assumes evenly spaced periods. If you buy mid-year, refinance, or fund rehab in irregular chunks (common on BRRRR deals), use XIRR and pair each cash flow with its actual date. It handles uneven timing correctly — and timing is exactly what IRR is sensitive to.

What's a good IRR on a rental?

There's no universal number, but general benchmarks help:

• 8–12% — typical for a stabilized, lower-risk buy-and-hold in a strong market.
• 12–18% — a solid leveraged single-family or small multifamily deal.
• 18%+ — usually signals value-add, BRRRR, or aggressive appreciation assumptions that deserve extra scrutiny.

Always ask where the IRR comes from. A 20% IRR built on a 5% appreciation assumption is far more fragile than a 13% IRR built mostly on cash flow and paydown.

The mistakes that quietly inflate IRR

IRR is powerful and easy to game. Watch for these:

• Optimistic appreciation. Because so much return sits in the exit, a half-point bump in appreciation can swing IRR by several points. Anchor your rate to market history, not hope — see what appreciation rate to use.
• Ignoring selling costs. Agent commissions, transfer taxes, and concessions can eat 6–8% of the sale. Leaving them out flatters the exit.
• Forgetting vacancy, capex, and expense growth. Thin operating assumptions inflate every year of cash flow before compounding.
• Confusing IRR with cash-on-cash. They answer different questions. IRR is a lifetime, timing-weighted rate; cash-on-cash is a single-year snapshot.
• Reinvestment assumptions. IRR implicitly assumes interim cash flows earn the same rate — rarely true. For deals with large early distributions, sanity-check against equity multiple.

Why real data beats guesswork here

IRR is only as trustworthy as its inputs — and it has more inputs than any other metric, each compounding across the hold. Guess the rent, fudge the tax growth, and eyeball appreciation, and your "14.5% IRR" is fiction. This is where analyzing the deal on live, verified numbers changes the game: tools like PropertyWiz AI pull real market value, rent, taxes, insurance, vacancy, and appreciation and model the full multi-year hold automatically, so your IRR reflects the market instead of your optimism.

Run IRR alongside cash-on-cash and cap rate, not instead of them. Together they tell you whether a deal wins on cash flow, on the exit, or — the deals worth chasing — on both.