What Is Internal Rate of Return?
IRR is the annualized rate of return an investment is expected to generate over its full holding period, accounting for the timing and size of all cash flows — including the eventual sale.
Advanced Explanation
IRR is the discount rate at which the net present value of all cash flows - the initial investment, periodic cash flows and sale proceeds - equals zero. Unlike cash-on-cash return, it reflects the timing of every cash flow. It implicitly assumes interim cash flows are reinvested at the IRR, and can be ambiguous when cash flows change sign more than once.
Why It Matters
Unlike cap rate or cash-on-cash return, IRR captures the full multi-year picture, including appreciation and the timing of cash flows.