SOBE Knowledge
What Is IRR? The Return That Respects Time
The internal rate of return prices every cash flow by when it happens — the professional’s answer to a question simple ROI cannot see.
What IRR means
IRR — the internal rate of return — is the annual rate at which an investment’s money going out and money coming in exactly balance. It is a return that respects the calendar.
Simple ROI answers “how much did I make on what I put in” and does not care when anything happened. IRR does: a euro received in year one is worth more than the same euro in year five, because it could have been working in the meantime. IRR is the single rate that prices every cash flow — the equity you invested, each year’s rental cash, the net sale proceeds — back to the day you started.
That makes it the standard language of professional investors, and the honest way to compare a five-year hold against a two-year flip or anything else with a different shape in time.
The formula — and why a computer solves it
Each cash flow CFt — negative when you invest, positive when the property pays you — is discounted by the unknown rate and the whole series is set to zero. There is no algebraic solution: the rate is found numerically, by iteration. Related: NPV is the same machine run the other way — fix the rate, read the value.
The Hold & Exit calculator runs exactly this computation on your equity, annual rental cash and net sale proceeds, and reports the estimated IRR next to total ROI.
A worked example — and why timing matters
Take the hypothetical five-year hold from our appreciation example: €580,000 of equity in, about €17,400 of rental cash each year, and €582,000 of net sale proceeds at exit.
Now move the money, not the total. If the same €669,000 arrived mostly in the early years instead of at exit, the IRR rises to 3.8% — identical total, better return, because the capital came home sooner. That difference is invisible to ROI and is precisely what IRR exists to see.
Your numbers, properly discounted
SOBE Hold & Exit ROI Calculator
Equity, rental cash and exit proceeds — with estimated IRR computed the same way the professionals do it.
IRR and the mortgage
Financing changes the shape of the flows: less equity in on day one, smaller annual cash after payments, the loan repaid out of the exit. Because the denominator shrinks more than the flows do, sensible leverage typically raises IRR — and raises the stakes identically: the same mechanism amplifies a weak outcome downward. An IRR quoted for a levered deal should always be read next to its loan-to-value.
Four ways an IRR figure lies
1. It leans on the exit. In most property IRRs the final year carries most of the weight, and the exit price is an assumption. Test the IRR at zero growth before believing it at three per cent.
2. It assumes reinvestment at itself. Mathematically, interim cash is presumed to earn the IRR — flattering for high-IRR projects. Real cash sits in real accounts.
3. Off-plan staging inflates it. When capital is deployed late through stage payments, the clock is short and the IRR looks brilliant. Compare the equity multiple alongside — time-weighted and money-weighted answers together.
4. It ignores risk and liquidity. A 7% IRR on an illiquid asset is not “better” than 5% on a prime one. IRR ranks speed, not quality.
Frequently asked questions
What is a good IRR for property on the Costa del Sol?
There is no universal target: IRR scales with leverage, risk and holding period. A modest unlevered IRR on a prime, liquid asset can be a better investment than a high levered IRR on a fragile one - read it next to the loan-to-value and the exit assumption.
How is IRR different from ROI?
ROI measures the total gain against capital invested and ignores timing. IRR prices every cash flow by when it happens - the same total received earlier produces a higher IRR. The two are read together, not interchangeably.
How is IRR different from annualised return?
Annualised return smooths the total outcome evenly across the years. IRR weights each actual cash flow by its date, so uneven flows - typical in property - produce different figures. IRR is the more precise of the two.
Why does my off-plan investment show such a high IRR?
Because stage payments deploy capital late, the clock is short and the rate looks brilliant. Check the equity multiple alongside: money-weighted and time-weighted answers together tell the honest story.
Does the SOBE calculator compute a real IRR?
Yes - the Hold and Exit calculator solves the IRR equation numerically from your equity contribution, annual rental cash flows and net sale proceeds, and labels it as an estimate, which any forward-looking IRR is.