RETrackerInternal rate of return (IRR) is the single annualized rate that makes the net present value of every cash flow in a deal — your down payment out, rent in each year, and the net proceeds when you sell — equal to zero. It is the most complete measure of a rental’s return because it accounts for cash flow, appreciation, principal paydown and time.
What is IRR and why does it matter?
Cap rate and cash-on-cash each look at one year. IRR looks at the entire hold and rolls it into one number you can compare against other investments — the stock market, a GIC, another property. It rewards returns that arrive sooner (a dollar next year is worth more than a dollar in year ten), which is why it is the metric funds and serious investors underwrite to.The formula
IRR is the rate r that solves: 0 = Σ (cash flow in year t) ÷ (1 + r)ᵗ, summed from year 0 to your sale. There is no clean algebraic solution — you solve it iteratively, which is what the calculator below does.IRR calculator (5-year hold)
Worked example: a 5-year hold
Take a $600,000 triplex that rents for $54,000 a year ($1,500 per unit per month). Operating expenses — property tax, insurance, maintenance, a vacancy allowance and management — run about 32% of rent, or $17,280, leaving net operating income (NOI) of $36,720. You put 25% down ($150,000) plus roughly $18,000 of closing costs including the welcome tax, so $168,000 of cash goes in. The $450,000 mortgage at 5.0% over 25 years costs about $31,572 a year ($2,631 a month).
Assume you hold five years, rents and expenses roughly track, and the property appreciates about 3% a year. Here is the cash-flow timeline:| Year | Cash flow |
|---|---|
| 0 — purchase (cash in) | −$168,000 |
| 1 | +$5,148 |
| 2 | +$5,148 |
| 3 | +$5,148 |
| 4 | +$5,148 |
| 5 — cash flow + net sale | +$269,968 |
IRR vs cap rate vs cash-on-cash
Cap rate and cash-on-cash are simple and honest about a single year. IRR is more complete but more assumption-heavy: it depends on your appreciation estimate, holding period and exit costs, all of which are guesses. Treat IRR as a scenario, not a promise — and always sanity-check it against the year-one numbers.Limitations
- IRR is only as good as your assumptions about rent growth, appreciation and sale price.
- It assumes interim cash flows are reinvested at the same rate, which rarely holds exactly.
- Two deals can share an IRR with very different risk and cash-flow timing — read it next to cap rate, cash-on-cash and DSCR.
Frequently asked questions
What is a good IRR for a rental property?
Many Canadian buy-and-hold investors target a 10–15% five-to-ten-year IRR, but the right bar depends on risk and your alternatives. Compare it to what the same money would earn elsewhere at similar risk.
What is the difference between IRR and cash-on-cash?
Cash-on-cash is a single year's cash yield on invested cash. IRR blends every year plus the sale into one annualized rate, so it captures appreciation and principal paydown that cash-on-cash ignores.
Does IRR include the mortgage and the sale?
Yes. IRR is built from the actual, levered cash flows: your down payment out, cash flow after the mortgage each year, and the net proceeds after paying off the loan and selling costs.
Is a higher IRR always better?
Not necessarily. A high IRR can come from aggressive appreciation assumptions or a short hold. Check the assumptions and the risk, and read IRR alongside the single-year metrics.
Keep reading
Cap rate
The unlevered yield: NOI divided by price.
Cash-on-cash return
The cash return on the actual cash you invest.
DSCR
The ratio lenders use to size your loan.
How to analyze a rental deal
The four numbers every Canadian investor runs before buying.
Sources
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