Real Estate / Underwriting
IRR (Internal Rate of Return)
Definition
Internal Rate of Return (IRR) is the time-weighted annualized rate of return that accounts for the timing and magnitude of all cash inflows and outflows over an investment's entire hold period, including operating distributions and exit proceeds, making it highly sensitive to timing assumptions.
Why It Matters to Hotel Investors
- Gold standard metric for comparing long-term investment opportunities
- Accounts for both cash flow during ownership and appreciation at exit
- Reflects time value of money, rewarding earlier returns
Common Mistake
Accepting projected IRR without sensitivity analysis—small changes in exit timing, exit cap rate, or revenue growth drastically impact IRR calculations.
Related Resources
Equity Multiple
Equity Multiple measures the total cash distributions received by investors divided by their initial equity investment, indicating how many times invested capital is returned over the hold period without accounting for the time value of money or timing of distributions.
How Cytation Generates Returns
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