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Commercial real estate IRR & equity multiple calculator
Model a simple hold: buy at a price, grow the NOI each year, carry a mortgage, and sell at an exit cap rate. The calculator shows the unlevered and levered internal rate of return (IRR), the equity multiple, total profit and the cash flow for every year. Works in Canadian or US dollars; nothing leaves your browser.
Results
- Levered IRR
- 7.69%
- Unlevered IRR
- 6.43%
- Equity multiple
- 1.41×
- Total profit
- $871,305
- Equity invested
- $2,100,000
- Going-in cap rate
- 6.00%
- Year-1 DSCR
- 1.36×
- Year-1 cash-on-cash
- 3.76%
- Sale price at exit
- $5,299,588
- Loan balance at exit
- $2,678,146
| Year | NOI | Debt service | To equity |
|---|---|---|---|
| 1 | $300,000 | $221,071 | $78,929 |
| 2 | $306,000 | $221,071 | $84,929 |
| 3 | $312,120 | $221,071 | $91,049 |
| 4 | $318,362 | $221,071 | $97,291 |
| 5 | $324,730 | $221,071 | $2,619,108 |
Works in Canadian or US dollars: enter every amount in the same currency. Calculated in your browser; nothing is sent or saved.
How it’s calculated
- IRR
The rate r at which −equity + Σ CFₜ ÷ (1 + r)ᵗ = 0 over the hold (annual cash flows) - Exit value
Sale price = NOI in the year after the sale ÷ exit cap rate; net of selling costs - Levered cash flow
CFₜ = NOIₜ − debt service; final year adds net sale proceeds − loan balance - Equity multiple
Equity multiple = total cash returned ÷ equity invested
Worked example (illustrative numbers)
- A buyer pays $5,000,000 for a property with a year-1 NOI of $300,000 (a 6.00% going-in cap rate), plus 2% acquisition costs, so the all-in cost is $5,100,000. A 60% loan of $3,000,000 at 5.50% (monthly compounding, 25-year amortization) costs $18,422.62 a month, $221,071 a year, leaving $2,100,000 of equity.
- NOI grows 2% a year. Year-1 cash flow after debt service is $78,929 (a 3.76% cash-on-cash return; DSCR 1.36×), rising to $103,658 in year 5.
- At the end of year 5 the property sells at a 6.25% cap rate on the year-6 NOI: $5,299,588 before 2% selling costs. After repaying the $2,678,146 loan balance, the final-year cash flow is $2,619,108.
- Result: unlevered IRR 6.43%, levered IRR 7.69%, equity multiple 1.41×, total profit $871,305. If the exit cap rate is 6.75% instead, the sale price drops to $4,907,026, the levered IRR to 4.58% and the equity multiple to 1.23×.
Illustrative figures for a fictitious property; the rates, growth and cap rates are not market figures or return targets for any property type or city.
IRR, equity multiple and cash-on-cash
The internal rate of return is the annual discount rate at which the present value of all the cash a deal returns equals the cash put in. It accounts for timing: money back in year 2 counts for more than the same money in year 10. The equity multiple ignores timing and simply compares the total cash returned with the equity invested, so a 1.41× multiple means every dollar of equity came back with 41 cents of profit. Cash-on-cash return is a single-year measure: one year's cash flow after debt service divided by the equity.
Read them together. A high IRR on a short hold can come with a small multiple, and a long hold can produce a large multiple at a modest IRR. Unlevered IRR measures the property itself; levered IRR shows the effect of the mortgage. Leverage raises the levered IRR only while the property's return is higher than the cost of the debt, and it widens the range of outcomes both ways.
The exit assumption drives the answer
On a five-year hold most of the return arrives with the sale, so the exit cap rate matters more than almost any other input. In the example, moving the exit cap rate from 6.25% to 6.75% cuts the levered IRR from 7.69% to 4.58%. Test a range rather than a single number, and be wary of an exit cap rate lower than the going-in rate unless there is a clear reason for it.
This calculator applies the exit cap rate to the NOI of the year after the sale, a common convention because a buyer prices the income they will receive. Some analysts use the final year's NOI instead; the difference is one year of growth. NOI grows at one flat rate here; a real projection follows the leases, with rent steps, expiries, downtime, leasing costs and capital items year by year.
What the calculator leaves out
It models a fully amortizing loan with level monthly payments at monthly compounding, repaid from the sale proceeds. It does not model interest-only periods, refinancing, lender fees, prepayment penalties, capital expenditures, reserves, income taxes, depreciation, waterfalls or promotes. Cash flows are annual and assumed to arrive at each year end. Treat the result as a screening figure, not a forecast.
Arithmetic only. This is not an appraisal, a valuation opinion, a forecast of returns, or investment, financial, legal or tax advice.
Return projections in an offering memorandum
Many offering memorandums for investment properties leave returns to the buyer and present the inputs instead: the rent roll, the operating statement, the pricing and the financing terms. If a seller does include projections, label them as projections, state every assumption (growth, vacancy, leasing costs, exit cap rate, loan terms) and keep the year-1 NOI consistent with the operating statement. OfferingStack's offering memorandum has a 10-Year Cash Flow page that lays out the columns and lines you enter and a Financing Assumptions page that calculates debt service, DSCR and debt yield from the loan inputs; it does not calculate an IRR for you.
Questions
How do you calculate IRR on a real estate investment?
List the cash flows by year: the equity paid in at the start as a negative number, then each year's cash flow after debt service, with the net sale proceeds less the loan payoff added in the final year. The IRR is the discount rate that makes the net present value of that series zero. In the example, $2,100,000 of equity returning $78,929 rising to $2,619,108 over five years is a 7.69% levered IRR.
What is the difference between levered and unlevered IRR?
Unlevered IRR uses the property's cash flows before any mortgage, measured against the full purchase cost. Levered IRR uses the cash flows after debt service, measured against the equity only. The gap between them shows what the financing does to the investor's return.
What is an equity multiple?
Total cash returned to the investor divided by the equity invested. $2,100,000 of equity that returns $2,971,305 over the hold is a 1.41× equity multiple. It does not account for how long the money was invested; IRR does.
What is a good IRR for commercial real estate?
There is no single answer: investors set their own targets by property type, risk, leverage and market conditions. This calculator doesn't supply benchmark returns; it calculates the return on the assumptions you enter so you can compare scenarios.
Why does the exit cap rate matter so much?
On a short hold most of the return comes from the sale, and the sale price is the NOI divided by the exit cap rate. A half-point change in the exit cap rate changes the sale price by several percent and the levered IRR by several points.
Is my data saved?
No. The calculation runs in your browser and nothing you type is sent to OfferingStack.
Related
Put the numbers in a finished offering memorandum.
Upload your fact sheet or rent roll, add the NOI and price, and review a watermarked preview of the financial and pricing pages before you buy anything.