July 15, 2025 • General
When you’re looking at commercial real estate deals, it’s easy to focus on surface-level numbers—purchase price, rental income, and maybe cash flow. But if you’re planning to hold a property over several years, there’s one metric you don’t want to ignore: Internal Rate of Return (IRR).
It might sound technical, but IRR is just a way of answering a pretty simple question:
How much could this investment make me each year, all things considered?
So, What Exactly Is IRR?
IRR is a way to measure the return you expect to earn on a property over time. It takes into account:
- How much cash you put in upfront
- What you expect to earn from rent year to year
- The costs involved in running the property
- And what you might sell the property for down the road
It’s not just about annual income—IRR considers the entire life of the investment and how the value of money changes over time. That’s why many investors prefer it over simpler tools like ROI or cap rate when making long-term decisions.
Why Does It Matter?
There are a few reasons IRR is a go-to number for experienced investors:
1. It Gives the Full Picture
IRR shows your expected annual return, factoring in both income and appreciation. It helps you see the big picture—not just what the property pays you today.
2. It’s Great for Comparing Deals
If you’re choosing between two different properties, each with different cash flows and timelines, IRR helps you compare them apples to apples.
3. It’s Useful in Partnerships
In syndications or group deals, IRR is often what sponsors use to show passive investors what kind of return to expect over several years.
What Counts as a Good IRR?
There’s no magic number, but here’s a general idea:
- 8% to 10%: Solid, lower-risk deals with steady tenants
- 11% to 15%: Mid-level risk—maybe some upgrades or lease-up needed
- 16% or more: Often higher risk, but potentially higher payoff
The better the return, usually the more work or risk it involves. But a well-managed property with strong fundamentals can hit solid IRR targets without being overly risky.
A Few Caveats
IRR is super helpful—but it’s not perfect. It’s only as good as the numbers you plug in. If you’re too optimistic with rent growth or underestimate expenses, your projected IRR could look better than reality.
Also, IRR doesn’t tell you how much money you’ll make in total—it’s just the rate. A deal with a lower IRR might still make more money than one with a higher IRR, depending on how it’s structured.
And one more thing: if your cash flow goes negative mid-way through the investment (like for a big renovation), IRR math can get a little weird and produce more than one answer. Just something to keep in mind.
Final Takeaway
IRR is a useful tool for measuring a deal’s long-term potential. It helps you estimate what kind of return you might see each year, while factoring in everything from rental income to the final sale.
It’s not the only number you should look at, but it’s definitely one you don’t want to skip—especially when you’re comparing several options or trying to decide whether a deal makes sense for your goals.
At Wellborn Real Estate, we can help you walk through numbers like IRR and find opportunities that make sense for your portfolio. Whether you’re buying your first building or adding to your current holdings, we’re here to guide you every step of the way.