What is Internal Rate of Return (IRR) and Why Does it Matter?

The internal rate of return (IRR) is a metric used by real estate professionals to determine the net money you’ve made on an investment by considering the timing and magnitude of the return. However, its main use is to compare investments. By calculating the IRR of many potential investments, you can see which one is wiser. The calculated IRRs must be higher than the company’s cost of capital, and whichever one is highest is the wiser investment (provided they have equal risk).  

The manual calculation for IRR is highly complex, and can only be solved through tedious trial and error. 

This equation is as complicated as it looks, and it’s only a three-year calculation. To solve it, you would have to keep testing potential IRRs until you get an NPV equal to zero. Your result would be the minimum percentage interest your company has to achieve in order to merely break even on an investment.

For such a tricky calculation, we highly recommend you use an Excel spreadsheet or a calculator such as this to make it go a lot smoother.

For more information on IRRs, check out the following links:

On what it is

On how to calculate it manually

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