IRR
Internal rate of return is the discount rate that makes all investor cash inflows and outflows equal zero over the hold period.
Why it matters
IRR changes what a disciplined buyer can pay, how much debt the asset can safely carry, and whether the return is coming from operations or fragile assumptions.
Formula
IRR is the discount rate where NPV of all cash flows equals zero.Worked example
In underwriting, tag IRR beside the exact source input and rerun the model when that input changes. The point is not a pretty metric; it is a better buy, hold, refinance, or walk decision.
How investors read it
Use it to kill bad deals quickly. If the back-of-envelope version does not survive conservative assumptions, do not spend five hours making it look alive.
Common mistakes
- · Treating the metric as a verdict instead of a screen.
- · Using broker-package assumptions without checking the source documents.
- · Ignoring taxes, capex, vacancy, financing terms, and timing.
- · Letting an optimistic exit or refinance assumption rescue a deal that does not work today.
Use current local data and source documents. Realist should show assumptions and date-stamp market inputs because stale inputs create fake precision.