IRR Calculator for Rentals: The Return Over the Whole Hold

Introduction

Cash-on-cash return tells you about one year. A rental is held for ten. Those are different questions, and the second one has a different answer often enough that judging a long hold on a year-one snapshot is a genuine mistake.

TL;DR: The defaults here produce a deal that loses $95 a month in year one and still returns 8.35% IRR with a 2.20x equity multiple over ten years — because amortisation and appreciation do the work that cash flow does not. Set expense growth above rent growth and watch it invert: at 2% rent growth against 6% expense growth, year ten cash flow is −$3,463 instead of +$3,458.

What IRR actually measures

Internal rate of return is the annualised discount rate at which the deal's cash flows net to zero. Put plainly: the constant annual return that would have produced the same outcome.

0 = −C₀
    + CF₁/(1+r)
    + CF₂/(1+r)²
    + …
    + (CFₙ + sale proceeds)/(1+r)ⁿ

Where C₀ is your cash in, each CF is that year's cash flow, and r is the IRR. There is no closed-form solution — it is found numerically, which is why every IRR is computed by a solver rather than a formula.

The reason IRR beats a simple total-return figure is that it accounts for when money arrives. $50,000 received in year one and $50,000 received in year ten are not the same asset, and IRR is the standard way of saying so.

Worked example

The defaults: $300,000 purchase, 25% down at 7.25% over 30 years, $6,000 closing and $5,000 of repairs — $86,000 of cash in. Rents at $2,400 with expenses at 40% of rent, rent growing 3% a year and expenses 3.5%. Appreciating 3%, held ten years, selling at 7% costs.

• Year one cash flow: −$1,139 (a loss of about $95 a month)
• Year ten cash flow: +$3,458
• Total cash flow over the hold: $10,826
• Property value at year ten: $403,175, against a loan balance of $194,198
• Net sale proceeds after 7% selling costs: $180,754
• Total profit: $105,581
• IRR: 8.35%. Equity multiple: 2.20x.

So a deal that never produces meaningful cash flow still roughly doubles the money. Almost all of the return comes from the sale — $180,754 of it against $10,826 of cumulative cash flow.

That is worth sitting with, because it cuts both ways. It means a modest-cash-flow property can be a perfectly good investment. It also means this deal's return is a bet on appreciation, and if the property is worth $300,000 in ten years instead of $403,175, the IRR is a fraction of 8.35%.

The assumption that quietly kills deals

Notice that rent growth and expense growth are separate inputs. That is the most important thing on this page.

Insurance premiums and property tax assessments have grown faster than rents across much of the country. When that persists, cash flow does not merely grow more slowly — it shrinks, because a fixed percentage of a smaller-growing number is being subtracted from a faster-growing cost base.

Set rent growth to 2% and expense growth to 6% on the same deal:

• Year one cash flow: −$1,139 (unchanged, since growth applies from year two)
• Year ten cash flow: −$3,463

The property goes from marginally improving to structurally deteriorating, and no single-year metric shows it. This is the scenario to model in any market where insurance has repriced — Florida, Louisiana, Texas, California wildfire zones — and it is the single most valuable thing this calculator does.

Equity multiple and NPV, and why you need all three

IRR is time-sensitive but scale-blind. A 25% IRR on $5,000 of profit and a 25% IRR on $500,000 look identical.

Equity multiple is scale-aware but time-blind. 2.20x is 2.20x whether it took five years or twenty — and those are very different investments.

NPV answers the only question that is actually decision-shaped: does this beat my alternative? Set the discount rate to your required return and a positive NPV means yes. On the defaults, at an 8% required return, NPV is +$2,842 — the deal clears the bar, but barely, which is exactly what an 8.35% IRR against an 8% requirement should look like.

Use all three. A deal with a high IRR, a low multiple and a slim NPV is usually a short hold with a big exit, which is a different risk profile from a long compounding hold with the same IRR.

Where IRR misleads

It assumes reinvestment at the IRR itself. The maths implicitly assumes every interim cash flow is reinvested at the same rate. For a deal returning 8%, that is roughly plausible. For one showing 45%, it is not, and the IRR overstates what you will actually experience. This is why MIRR exists.

It is exquisitely sensitive to the exit assumption. On a ten-year hold, most of the return is the sale, so appreciation and the exit cap rate dominate. Run the calculator at 0% appreciation before you believe any IRR.

It can be undefined. If the cash flows never change sign — an all-cash purchase that never distributes, say — there is no IRR, and this calculator reports it as undefined rather than inventing a number.

It ignores tax entirely. Depreciation, cost segregation, passive-loss rules and the 1031 exchange at exit can all move after-tax IRR by several points in either direction.

FAQ

What is a good IRR for a rental property?

Long-hold residential rentals commonly underwrite to 10–15% IRR; value-add and development target higher because the risk is higher. But an IRR is only as good as the appreciation assumption underneath it, so compare deals at the same appreciation rate before comparing their IRRs.

What is the difference between IRR and cash-on-cash return?

Cash-on-cash is a single-year ratio: that year's cash flow over your invested capital. IRR covers the entire hold and includes the sale, weighted by when each dollar arrives. A property can have a poor cash-on-cash and a strong IRR — the defaults here are exactly that case.

Why is my IRR so dependent on the sale price?

Because on a typical leveraged rental, the sale is most of the money. On the defaults, $180,754 of net proceeds against $10,826 of cumulative cash flow — 94% of the profit arrives on the last day. That is the nature of a leveraged appreciating asset, and it is why exit assumptions deserve more scrutiny than any other input.

Should I use IRR or NPV to decide?

NPV, if you have to pick one, because it is denominated in dollars against your required return and it does not have IRR's reinvestment problem. IRR is better for communicating and comparing across deal sizes. Compute both — they disagree often enough to be informative when they do.

What appreciation rate should I assume?

Long-run US home price growth has been roughly in line with inflation plus a small margin, so 2–3% is a defensible base case and anything above 4% is an aggressive assumption that should be stated as such. The more useful exercise is to set it to 0% and confirm the deal still works — if it does not, you are buying appreciation, not real estate.

Can I use this for a value-add or BRRRR deal?

Partly. The model assumes a stabilised property from day one, so it will not capture a rehab period with no rent or a mid-hold refinance. For the refinance mechanics use the BRRRR calculator, then model the stabilised years here.

Conclusion

Run it three times. Once with your base assumptions, once with 0% appreciation, and once with expenses growing two points faster than rent. If the deal survives all three, the IRR means something. If it only works in the first, what you have is a forecast rather than an investment.