IRR Calculator · Practical guide
How to Calculate IRR for a Rental Property
Model the down payment, yearly rent profits, and eventual sale as cash flows to get your true annualized return.
At a glance
The Basic Setup
To find a rental property's IRR, treat every dollar in or out as a cash flow: the initial investment is your down payment plus closing costs (entered as a negative number), each year is your net rental income after expenses and mortgage, and the final year adds your net sale proceeds. The IRR is the single annualized rate that ties all those flows together.
Interactive tool
IRR Calculator
Enter your own values, then compare the result with the examples below.
Yearly Cash Flows
Net Present Value at Various Rates
| Discount Rate | Net Present Value (NPV) |
|---|
Worked Example
Suppose you buy a duplex with $50,000 out of pocket. After mortgage, taxes, insurance, and maintenance, it nets $4,800 per year. In year 5 you sell and walk away with $60,000 after paying off the loan and closing costs, so the year-5 cash flow is $4,800 + $60,000 = $64,800.
- Initial investment: -$50,000
- Years 1-4: +$4,800 each
- Year 5: +$64,800
Running those flows gives an IRR of about 12.7%. For reference, the net present value at an 8% discount rate is +$10,000 — the deal clears an 8% hurdle with room to spare.
What to Include in the Cash Flows
- Net rent: gross rent minus vacancy, repairs, management, insurance, taxes, and mortgage payments.
- Final year: add the expected sale price minus the remaining loan balance and selling costs (typically 6-8%).
- One-time hits: put major repairs (a new roof, say $8,000 in year 3) into that year's cash flow instead of smoothing them.
How to Judge the Result
Many buy-and-hold investors target an IRR of 8-12% on rentals. If your number lands below what a simple index fund might return, the property needs to justify itself through appreciation assumptions or tax benefits — rerun the calculator with a higher sale price to see how sensitive the IRR is to your exit estimate.
Frequently Asked Questions
Should I include the mortgage payment in the cash flows?
Yes. Use net cash flow after the mortgage payment, and make sure your initial investment is only your out-of-pocket money (down payment plus closing costs), not the full purchase price.
What IRR should a rental property have?
A common target is 8-12% for stable buy-and-hold rentals. Higher-risk value-add deals often require 15% or more to be worth the effort.
How do I handle a year with negative cash flow?
Enter it as a negative number for that year. The calculator handles mixed positive and negative flows, as long as the overall pattern has at least one sign change.
Does IRR account for appreciation?
Only through the sale proceeds you enter in the final year. The assumed sale price is the single biggest lever on a rental IRR, so test a range of exit values.