The Truth about IRR’s

The technical definition of an Internal Rate of Return (IRR) is the discount rate at which the net present value (NPV) of a project’s cash inflows and outflows, measured over the project’s life, equals zero. The IRR is a forecast based on assumptions of expected cash flows and future sales price.

For example, if you purchase a DST for $1,000,000 that pays you $50,000 per year (5.0% cap rate) for 6 years then sell it for the same price you purchased it (after costs), your Internal Rate of Return would be 4%. If you sell the property for twice what you paid (after costs), your internal rate would be 14%.

If the DST has a lease, keep in mind that a shorter remaining lease term will negatively affect the return as will an increase in interest rates.

Using past IRRs based on historically low interest rates are not a reliable indicator for future performance.

The formula: