Faro Labs / Tools / IRR calculator
IRR calculator
The one return metric that counts both the size and the timing of every dollar: cash in, rent along the way, and what's left after the sale.
$110,000 invested returns $41,270 in cash flow plus $244,034 at sale: an annualized 11.0%.
What IRR actually measures
IRR is the annualized rate at which every dollar in and out of a deal nets to exactly zero in present-value terms. There's no closed-form solution. It's found by trial, which is why it lived in spreadsheets before it lived on the back of napkins. What it buys you is timing: a dollar of profit in year two is worth more than the same dollar in year ten, and IRR is the only common metric that says so.
Why the exit dominates
On a typical leveraged rental held ten years, the sale proceeds are the largest single cash flow by a wide margin, so the IRR is mostly a function of two assumptions you can't verify today: the appreciation rate and the selling costs. Run it at 2 percent appreciation and again at 4 before you believe any single number. The spread tells you how much of the return is real and how much is forecast.
Its blind spots
IRR assumes interim cash flows get reinvested at the IRR itself, which is optimistic for a high-return deal. It also flatters short holds: flipping $30,000 of profit in nine months produces a spectacular IRR on a deal that made less money than a boring rental held a decade. Read it next to the equity multiple, which ignores time entirely: together they tell you both how fast and how much.
IRR questions
What is a good IRR for a rental property?
Private real estate investors commonly target 12 to 20 percent, with stabilized long-term rentals at the lower end and value-add or development at the higher end where the risk is. Because IRR depends so heavily on the exit assumption, a projected 18 percent built on 5 percent appreciation is a weaker claim than a projected 12 percent built on 2 percent.
IRR or cash-on-cash, which should I use?
Both, for different questions. Cash-on-cash tells you what the property pays you next year, which is what you live on and can verify quickly. IRR tells you what the whole hold earned including the sale. A deal can have thin cash-on-cash and strong IRR if appreciation carries it: that's a real result, and also a riskier one.
What's the equity multiple?
Total dollars returned divided by total dollars invested. A 2.0× means you got back twice what you put in, counting cash flow and sale proceeds. It ignores time completely, which is exactly why it pairs well with IRR: the multiple says how much, the IRR says how fast.
Every calculator
The cash flow going into this should be real.
Faro underwrites an actual address from real comps, so year-one cash flow is measured rather than assumed.
Estimates for analysis and educational use only: not financial, investment, tax, or legal advice. Verify every number independently before making a purchase decision.