What is a good IRR for real estate?
There is no single good IRR, because the number is set as much by four decisions as by the property: how much leverage the deal carries, how long it is held, how much risk the strategy takes, and whether the figure is quoted before or after fees and promote. A levered IRR and an unlevered IRR on the identical building are not comparable, and neither are two levered IRRs at different hold periods. The productive test is relational: read every internal rate of return next to its equity multiple, its hold period, its leverage, and the exit cap rate that produced it, because on a typical five-year hold the exit assumption is carrying most of the number.
Why the question has no number in it
An internal rate of return is the discount rate at which a deal's cash flows net to zero, which makes it a summary of one specific cash flow stream. That stream is shaped by decisions rather than by the real estate: how much was borrowed, when capital was called, when the property was sold. Two sponsors can underwrite the same building, agree on every operating assumption, and publish internal rates of return several points apart.
It is also the return measure that responds most to time. Because it rewards early cash, shortening the assumed hold raises it, so a target can be reached by selling sooner rather than by performing better. A figure produced that way is a statement about an exit the sponsor does not control, in a market that may not be there.
| Equity multiple | Hold | Approximate IRR |
|---|---|---|
| 1.65x | 3 years | 18.2% |
| 1.65x | 5 years | 10.5% |
| 2.00x | 5 years | 14.9% |
| 2.00x | 8 years | 9.1% |
Levered and unlevered answer two different questions
An unlevered internal rate of return measures the real estate: the property's own cash flow and its sale, with no loan in the picture. A levered one measures the real estate plus the financing decision. Comparing the two is comparing an asset to an asset plus a position on the cost of debt, and the levered figure sits above the unlevered one whenever leverage is positive and below it whenever it is not.
So a high levered figure is not by itself evidence of a good property. It can be evidence of a large loan, and the same loan that lifted the base case is what removes the equity in the downside. The pair worth reading is the unlevered figure for the asset and the spread between the two for the financing. A deal whose whole return is the spread is a financing trade with a building attached to it.
Gross, net, and the promote in between
Four combinations get quoted on one deal: levered or unlevered, gross or net of fees and promote. What an investor actually receives is the levered net figure, and it is the one least often shown in marketing material. On a structure with an eight percent preferred return and a twenty percent promote, the gap between the deal-level gross return and the limited partner net return can run to several hundred basis points, which is frequently the difference between clearing a hurdle and missing it.
There is no conversion between them that works from the outside, because the gap depends on whether the preferred return compounds, whether it is cumulative, whether there is a catch-up, and what fees sit above the waterfall. The only reliable method is to run the actual distribution tiers on the actual cash flows and read the limited partner column.
Risk is what a return is supposed to be paid for
Strategies carry different risk and are therefore underwritten to different returns. A stabilized asset held for income takes little execution risk. A value-add plan takes renovation and lease-up risk. A development takes entitlement, construction and absorption risk on top. Ranking those on internal rate of return alone ranks them on risk taken rather than on skill applied, and the highest number belongs to whoever took the most of it.
The comparisons that do work are against alternatives rather than against a figure remembered from another cycle. The unlevered return against what the same capital earns in a stabilized asset. The levered return against the unlevered one, which prices the financing. And any of them against the risk-free yield over the same period, because a return that does not clear a Treasury by a margin you can defend has not been paid for the illiquidity, the effort or the risk.
- State the hold period. An internal rate of return without one is not a return.
- State levered or unlevered, and gross or net. Four numbers exist on every deal and only one is what an investor receives.
- Show the equity multiple beside it. A multiple cannot be improved by selling earlier, which is what makes it the honest check.
- Show the exit cap rate that produced it, and what happens fifty basis points either side of it.
Reading one inside a full underwriting
Altyst reports levered and unlevered internal rate of return, the equity multiple, cash-on-cash for every year of the hold and the after-tax version, alongside base, upside and downside cases, and it capitalizes the stabilized net operating income at an exit cap rate you set and can stress. The solver is decimal-exact and guards against the spurious roots a spreadsheet function can return on a cash flow whose sign alternates.
None of that produces a good number, and no software can. What it produces is the set of figures that have to be read together before anybody can judge one: the multiple, the hold, the leverage, and the exit assumption underneath the whole thing. This page explains how the measure behaves; it is not investment advice, and nothing here is a projection of what any deal will return.
Related questions
What is a good IRR for a real estate investment?
No single figure answers it, because an internal rate of return is set as much by leverage, hold period and strategy as by the property. The productive comparisons are relational: the levered figure against the unlevered one to price the financing, the figure against its own equity multiple to see whether it was earned by performance or by an early exit, and the figure against what capital at similar risk earns elsewhere over the same period.
What is the difference between levered and unlevered IRR?
An unlevered internal rate of return uses property-level cash flow with no debt, so it measures the real estate. A levered one uses cash flow after debt service and sale proceeds after the loan is repaid, so it measures the real estate plus the financing decision. The levered figure is higher when the cap rate exceeds the loan constant and lower when it does not, and the two are never directly comparable.
Is a higher IRR always better?
No. A higher figure can come from more leverage, a shorter assumed hold, a tighter exit cap rate, or a riskier strategy, none of which is the same as a better outcome. It also says nothing about scale: a large return on a small equity check and a smaller return on a large one are not comparable propositions. Read it with the equity multiple, the hold period and the exit assumption attached.
Why does a shorter hold period raise the IRR?
Because the measure is time weighted, so the same total profit collected sooner compounds at a higher annual rate. A 1.65x equity multiple is roughly an 18 percent internal rate of return over three years and roughly 10.5 percent over five, with no interim distributions in either case. That is why a model can be tuned toward a target by assuming an earlier exit rather than a better result.
What IRR do real estate funds target?
Targets are set per strategy and per fund and appear in the offering documents rather than in any market-wide standard, because a stabilized income strategy and a development strategy are underwritten to different returns for the different risks they take. A target is also not a result. The more useful questions are what prior funds of the same strategy actually realized net of fees and promote, and how many of those investments are fully exited rather than still marked.
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