Does anyone use internal rate of return to assess the profitability of a potential rental? I feel like this might be a more wholistic picture than just cash on cash return.
Lender · Chicago, IL · Member since 2025 · 204 posts · 101 votes
7mo
IRR is absolutely a valid way to evaluate a rental, and you’re thinking about this the right way. It can give a more complete picture than cash-on-cash alone, it just depends on what you’re trying to measure and your investing strategy.
Cash-on-cash is helpful for a quick snapshot of how your money is performing right now. A lot of investors like it because it’s straightforward and focused on current returns compared to cash invested.
IRR looks at the bigger picture. It factors in cash flow over time, principal paydown, appreciation, and your exit strategy. It also accounts for the time value of money, which makes it useful when you’re comparing deals with different hold periods or long-term plans.
The reality is IRR depends heavily on assumptions. Rent growth, appreciation, and future sale price projections all matter. If those numbers are off, the IRR can paint an unrealistic picture. That’s why many experienced investors don’t rely on just one metric.
I typically see savvy investors look at multiple layers:
• Cash-on-cash for immediate performance
• DSCR and true cash flow for risk and lender perspective
• IRR for long-term comparison
• Stress testing for vacancies, repairs, and rate changes
No single metric tells the whole story, but IRR is a strong tool when used with the fundamentals. The investors who run multiple analyses tend to make the most disciplined decisions.
Are you analyzing for long-term hold or shorter-term reposition and exit?
Hinton, WV · Member since 2026 · 1k+ posts · 373 votes
7mo
One thing that saved me from bad deals: always run 3 scenarios - best case, worst case, and realistic. Most people only look at the rosy numbers. Worst case assumes higher vacancy, bigger repairs, lower rents. If it still works in worst case, you've got a winner. What's your go-to method for stress testing deals?