Investors use different metrics to assess potential investments. One of these metrics is the internal rate of return (IRR), which real estate investors use because it quickly identifies an asset’s potential profitability.
As a metric, IRR is based on the net present value (NPV) of money. NPV represents the difference between the present value of cash gains and the present value of cash losses over a specific period. In other words, NPV assesses an investment by comparing the present value of future cash flow (rental income, appreciation, etc.) and outflow (e.g., operating expenses) to the initial cost of the investment. This means NPV and IRR have similar uses. They both aim to determine profitability over time. [1]
IRR calculations rely heavily on projected future cash flows, which means they are not entirely accurate. Unpredictable external factors can influence projected cash flow. It’s important to remember that metrics like these are sensitive to economic disruptors. Therefore, market volatility must always be considered when underwriting.
So, while IRR does not completely accurately depict a property’s future returns, it can still help you recognize the investment opportunities with higher potential.
It is important to note that investors are not expected to calculate IRR by hand. Investors can use a financial calculator and simply enter the details of a real estate property to calculate the final IRR within seconds. There are numerous IRR calculators available online, offering a range of options and varying levels of detail. One widely used method of measuring IRR is the XIRR function in Excel, especially when dealing with irregular cash flows. [2]
WHAT IS THE DIFFERENCE BETWEEN IRR & ROI?
While the internal rate of return (IRR) and return on investment (ROI) share similarities, they are not interchangeable. In fact, these two metrics will yield entirely different outcomes and vary in how they measure returns and suitability for different investment scenarios. [3]
ROI is a more straightforward calculation: profit divided by investment expressed as a percentage. So, your ROI on a lemonade stand that costs $20 to set up and where you make $50 in profits is 250% ((50 / 20 = 2.5) * 100).
However, ROI doesn’t consider the length of a project, whereas IRR measures cash flow over time. Why does this matter? Bugay Investments says, “The faster you reinvest your money, the more you make.” [4] This is because these reinvestments have the potential to yield higher returns. Since you can reinvest your returns from an investment, you can essentially earn interest on your interest due to the principle of compounding. [3]
Remember that IRR factors in time. Therefore, a 15% ROI over five years could be less favorable than a 12% IRR in two years, because the IRR was achieved in a shorter timeframe. [5]
While IRR can help you determine an investment’s potential, it does have its limitations. IRR is still limited to estimates and projections. As such, it can be misinterpreted. Investors should always consider this when using the internal rate of return (IRR) for prospective real estate investments. [6]
Another limitation of the IRR is that it can lead to some ambiguity in cases where cash flow patterns are non-standard. IRR is also sensitive to the size of the initial investment, which can distort the true profitability of the real estate property.
Performance indicators like IRR and ROI ensure prudent investing when measuring a property’s profitability rather than relying on qualitative information. Using multiple metrics is the most effective way to find investment opportunities while building your portfolio. [6]
WHAT IS AN IDEAL IRR FOR MULTIFAMILY REAL ESTATE INVESTMENTS?
Where numbers can vary with IRR is the frequency with which you measure cash flows. So, if you just measure your cash flows annually, your IRR will always be lower than if you measure it monthly, which will always be lower than if you measure it daily.
You may have heard that the higher the IRR, the better, as it represents a higher return on investment. However, what is considered an ideal IRR depends on the investor’s goals, the investment’s risk level, the cost of capital, and other factors. Timing is another consideration. The following example from J.P. Morgan illustrates how time impacts IRR:
“Consider two multifamily real estate properties, both requiring a $1 million initial investment and generating $200,000 in cash flow before being sold for $1.2 million in the fifth year. One produces $50,000 in cash flow annually, while the other produces no cash flow for two years, then $100,000 each of the remaining years. Both properties generate the same total cash flow, but the first has a higher IRR because it generates some cash flow earlier.” [7]
| Year | Property A Cash Flow | Property B Cash Flow |
| 0 | ($1,000,000) | ($1,000,000) |
| 1 | $50,000 | 0 |
| 2 | $50,000 | 0 |
| 3 | $50,000 | $100,000 |
| 4 | $50,000 | $100,000 |
| 5 | $1,200,000 | $1,200,000 |
| IRR | 7.58% | 7.3% |
Source: J.P. Morgan, 2024, [K]
What one investor may consider an acceptable IRR may not be ideal for another. Some investors may prefer an IRR of 25% or higher, while others may be more comfortable with a 20% IRR. Consider using various metrics beyond IRR and ROI to inform your investment decisions and align them with your goals.
WORK WITH BAM CAPITAL FOR MULTIFAMILY REAL ESTATE INVESTING
BAM Capital partners with accredited investors who want to enjoy passive income and all the other benefits of multifamily private placement. As the private equity arm of The BAM Companies, BAM Capital has been focusing on buying the most profitable assets and staying disciplined in its investment thesis. BAM Capital’s investment strategy aims to create forced appreciation while mitigating investor risk. To date, the brand has successfully managed over $1.7 billion in assets across ~9,000 apartment units. [8]
Remember that no investment is risk-free. Before making financial decisions, consult your investment advisor and schedule a call with a BAM Capital investment team member.
Disclaimer: All investments carry risk, including potential loss of capital. This content is for informational purposes only and is not financial, legal, or investment advice, nor an offer or solicitation to buy or sell any security. Consult an independent advisor for personalized guidance and contact BAM Capital for details on current offerings. BAM Capital and its representatives are not fiduciaries or investment advisors. The information provided is general and may not reflect individual financial goals. Any financial terms, projections, or forward-looking statements contained herein are hypothetical in nature and should not be interpreted as guarantees of future performance or safety. Such statements reflect BAM Capital’s opinion and are subject to market fluctuations, economic conditions, and investment risks. Past performance does not predict future results. BAM Capital and its affiliates do not guarantee the accuracy or completeness of this information. BAM Capital offers investment opportunities under Rule 506(c) of Regulation D exclusively for accredited investors as defined by the SEC. Verification of accredited investor status is required prior to participating in any investment.
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SOURCES:
[1]: Pathways to Passive Wealth. (2025). “Topic 3.1 | Key Metrics for Investors.” https://learn.bamcapital.com/courses/multifamily-real-estate/lessons/topic-3-evaluating-multifamily-investments/topics/topic-3-1-key-metrics-for-investors/
[2]: Rocket Mortgage. (2024). “What is IRR (internal rate of return)?” https://www.rocketmortgage.com/learn/irr-real-estate
[3]: Google Generative AI. (2025). “IRR vs. ROI in multifamily real estate compare and contrast.” https://www.google.com/search?q=IRR+vs+ROI+in+multifamily+real+estate+compare+and+contrast
[4]: YouTube. (2020). “IRR vs ROI vs CCR… What are these investment acronyms?” https://www.youtube.com/watch?v=p5uFtZTRGn4
[5]: YouTube. (2025). “IRR vs. ROI: Which Matters More in Real Estate Lending?” https://youtube.com/shorts/5ObxgxuCaQQ?feature=shared
[6]: WallStreetPrep. (2025). “Internal Rate of Return (IRR).” https://www.wallstreetprep.com/knowledge/irr-internal-rate-of-return
[7]: J.P. Morgan. (2024). “Using IRR to evaluate real estate investments.” https://www.jpmorgan.com/insights/real-estate/commercial-term-lending/what-is-internal-rate-of-return-in-commercial-real-estate
[8]: BAM Capital. (n.d.). “Current portfolio.” https://bamcapital.com/
