Internal Rate of Return (“IRR”)
The rate of discount on an investment that equates the present value of the investment’s cash outflows with the present value of the investment’s cash inflows. You can think of IRR as the rate of growth a project is expected to generate. While the actual rate of return that a given project ends up generating will often differ from its estimated IRR rate, it is a useful metric to use to compare investment opportunities. IRRs can also be compared against prevailing rates of return in the securities market. IRR projections for property investments are dependent on a number of assumptions made in the project underwriting and those assumptions should be examined in conjunction with IRR. IRR, like other measures of return, also has a correlation to investment risk.
For much more on the topic, including numeric examples, please review our blog post on IRR.