One number, a lot of moving parts
IRR blends every year of cash flow with the final sale into a single annualized return, which is what makes it the right number for comparing this against other investments — but it also means a single optimistic assumption (appreciation, vacancy) can swing it more than it would a simpler metric. For the quick version of this without financing or tax, see the Rental Property ROI Calculator.
Frequently asked questions
What is IRR and why not just use cash-on-cash return?
Cash-on-cash only looks at year-one cash flow versus cash invested. IRR accounts for every year of cash flow plus the eventual sale proceeds, all discounted for when they arrive — it's the more complete return figure for a multi-year hold.
Does this account for depreciation and its tax effect?
Yes — it depreciates the building portion (price minus land value) over 27.5 years, straight-line, and applies your tax rate to the resulting paper loss or gain each year. It doesn't model the passive-activity-loss limitation rules or the 25% depreciation-recapture rate at sale, both real nuances a tax professional should check for a large investment.
What is a reasonable vacancy rate to assume?
5% (about 2.5 weeks a year) is a common baseline for stable rental markets; use a higher figure for higher-turnover properties like short-term or student rentals.
Last updated: June 2026