Internal Rate of Return (IRR)

Internal rate of return is the one discount rate that brings an investment's net present value to exactly zero, and it is read as the yearly return across the whole holding period. For income property, IRR combines each year's NOI or cash flow with the sale proceeds, so it captures both income and appreciation.

Hold the default house for five years with flat NOI, all cash, and resell for the $500,000 purchase price. The IRR comes out at the 5.78% cap rate. Resell at a 6.5% cap rate, about $444,500, and the IRR drops to about 3.7%.

That spread shows how much the exit assumption drives IRR. Small changes to NOI growth and exit cap rate move the result more than most other inputs. A quoted IRR is only as good as the NOI and sale price behind it.