Internal Rate of Return (IRR)

IRR is the one annual rate that zeroes out the NPV of a deal's full cash flow stream, from the purchase through each operating year to the sale. It is the multi-period return that gross rent multiplier defers to. GRM sorts properties in seconds; IRR decides between the survivors over the whole holding period.

IRR captures everything GRM ignores: expenses, financing, rent growth, loan paydown, a refinance, and the terminal value at sale. Its cost is that every one of those is a forecast, and an IRR is only as good as its exit assumption.

The two are related through the market. A low GRM usually means a high current yield and often slower growth; a high GRM means a low yield and a bet on growth. Two properties with different GRMs can have the same IRR if the growth assumptions differ enough. GRM tells you what you are paying for rent today; IRR tells you what the whole investment is expected to return, and the second needs the first to be worth computing.