Internal rate of return, or IRR, is the yearly return on the money you put into a property once you count every dollar it hands back and the date each one arrives.
Cash-on-cash return does far less. It divides one year of cash flow by the cash you put in, and stops.
What does IRR measure that cash-on-cash misses?
A rental pays you in four ways, and only one of them reaches your bank account each month.
- Cash flow. What is left after the mortgage and every running cost.
- Loan paydown. Each payment retires a little principal, and the rent funds it.
- Price growth. Any gain in what the property is worth when you sell.
- The sale. Minus the cost of selling it.
IRR folds all four into a single yearly rate, and it cares when each dollar lands. A dollar of profit in year one is worth more than a dollar in year ten, because you had nine extra years to use it. That timing is the reason IRR exists at all.
Cash-on-cash sees only the first of the four. On the house below it reports 8.8% while the deal is doing considerably more than that.
What is a good IRR for a rental property?
No agency publishes a benchmark, and any figure you see quoted is somebody’s house view. The number also moves with how long you hold, what you assume about prices, and whether you sell at the end or keep going.
So use it as a comparison, not a grade. Two uses hold up:
- Against another deal. Same assumptions, same holding period, two properties. The higher IRR is doing more with your money.
- Against a hurdle you set first. Decide what the money would have to earn before the work and the risk are worth it, write it down, then run the deal.
Setting the hurdle first matters. An IRR worked out after you have fallen for a house tends to find a growth rate that justifies it.
Treat any IRR on a seller’s sheet the same way. It rests on a growth assumption, and growth is the input with the most room to flatter.
A worked example: five years on one house
The example house costs $250,000 with 20% down on a 30-year loan at 7%, and rents for $2,750 a month. Vacancy is set at 5%, taxes at $3,000 and insurance at $1,400 a year, with 5% of rent for repairs, 5% for replacements and 8% for management. Buying costs are 3% of the price and selling costs 7%. Prices are assumed to rise 3% a year and rents 2%.
That puts $57,500 in up front and leaves $420 a month in cash flow. Here is where the profit comes from if you sell after five years.
| Five years | |
|---|---|
| Cash flow kept | +$29,501 |
| Loan balance paid down by the rent | +$11,737 |
| Price growth at 3% a year | +$39,819 |
| Buying costs (3% of the price) | −$7,500 |
| Selling costs (7% of $289,819) | −$20,288 |
| Profit on the sale | +$53,269 |
These are example figures, not a forecast for any market.
That $53,269, earned over five years on $57,500, works out at a 16.0% IRR.
Why is the IRR double the cash-on-cash return?
Because cash flow is the smaller part of the return. Of the $81,057 this house produces before costs, rent in your pocket is $29,501. Loan paydown adds $11,737 and price growth adds $39,819.
Cash-on-cash counts only the first number. IRR counts all three, then charges the deal for the $7,500 it cost to buy and the $20,288 it costs to sell.
That gap is not free money. The two larger pieces are both locked in the property until you sell or refinance, while the $420 a month is spendable now. A high IRR next to thin cash flow describes a deal you cannot touch for years. For what that feels like month to month, see whether a rental that loses money each month is ever worth buying.
Does holding longer raise the IRR?
Up to a point, then it falls.
| Held for | IRR | Profit on the sale | |
|---|---|---|---|
| 5 years | 16.0% | $53,269 | |
| 10 years | 17.5% | $153,717 | |
| 30 years | 15.5% | $880,156 |
Five years is dragged down by the 3% buying cost and the 7% selling cost, which land on a short hold with nothing to spread them over. By ten years the rent has grown, the loan has shrunk and those one-off costs matter less, so the rate peaks.
After that it drifts down. The profit keeps climbing to $880,156, but it arrives later and later, and IRR discounts a distant dollar hard.
What happens if prices and rents rise more slowly?
Growth is the assumption doing the heavy lifting, so it is worth testing against what has actually been happening.
The Federal Housing Finance Agency reported that US house prices rose 2.1% between the second quarter of 2025 and the second quarter of 2026, in a release dated 25 August 2026. Over the 12 months to August 2026, the Bureau of Labor Statistics put the change in rent of primary residence at 2.7%.
Those are national figures and your street is not the nation, but they make a fair second case to run.
| Prices rise | Rents rise | 10-year IRR | |
|---|---|---|---|
| 3% a year | 2% a year | 17.5% | |
| 2.1% a year | 2.7% a year | 16.9% | |
| Not at all | Not at all | 8.6% |
The middle row barely moves the answer. The bottom row halves it, and that is the one worth sitting with: strip out growth entirely and this house still returns 8.6% a year, because the rent and the loan paydown carry it on their own.
A deal that only works in the top row is a bet on prices. A deal that still clears your hurdle in the bottom row is not.
Which number should you actually use?
Use both, for different jobs. Cash-on-cash tells you what the property pays you while you own it, which is the number that decides whether you can afford to hold on through a bad year. IRR tells you what the whole hold was worth once you sell.
Run your own hurdle rate and the no-growth case through the buy and hold calculator before you make an offer. If you want the simpler measures first, start with how to calculate ROI on a rental property, then cap rate against cash-on-cash return.