A Key benchmark tool to compare difference investments - IRR

Aug 27

Written By Jay Wu

When you’re looking at investments—whether in real estate or stocks—you’ll often hear about IRR, or Internal Rate of Return. It could serve as a benchmark tool to evaluate returns for different investment products including real estate, stocks, options, etc. Professionals use it all the time, but for many beginners, it sounds intimidating. The good news is: once you understand the logic, IRR is actually very intuitive.

What Is IRR?

IRR stands for Internal Rate of Return. It’s a way of asking:

👉 “If my investment grew steadily at the same speed every year, what would that annual growth rate be?”

The key thing is that IRR doesn’t just look at how much money you make in total. It also considers when the money comes back to you.

That timing makes a huge difference.

A Simple IRR Example

Let’s say you invest $100.

Case 1: You get $110 back after 1 year.
That’s a 10% return in one year. Straightforward.
Case 2: You get $110 back after 2 years.
The total profit is still $10, but now it took 2 years. That means, on average, your money only grew about 5% per year.

👉 Same total gain, but stretched over more time = lower IRR.

This is the whole point: the earlier you get your money back, the higher the IRR.

How IRR Works in Real Estate

Real estate is a perfect example because it usually has multiple cash flows:

You put money in at the start (down payment, closing costs).
You collect rental income each month or year.
At the end, you sell the property and (hopefully) make a profit.

If you only looked at the total return, you might miss the fact that you’re also collecting rent along the way. IRR takes both the total amount and the timing of those payments into account, giving you a single annual percentage return that’s easier to compare to other investments.

Comparing Real Estate vs Stock Investments

Now let’s compare two scenarios that both make you the same total amount:

Stock Investment

You invest $100.
You don’t get anything back during the 5 years.
At the end of year 5, you sell for $160.
Total profit: $60.

Here, all your money comes at the end, so the IRR works out to about 10% per year.

Real Estate Investment

You invest $100.
Each year, you receive $8 in rental income. Over 5 years, that adds up to $40.
At the end of year 5, you sell the property for $120 (your $100 back, plus $20 appreciation).
Total profit: also $60.

But here’s the difference: you’re collecting part of that money every year, not just at the end. Because you get cash earlier, your IRR is higher—about 13% per year.

Why the Difference?

Both investments give you the same total return ($160 from $100). But the timing of the cash flows is different:

With stocks, you wait the whole 5 years for your payoff.
With real estate, you get rent along the way, plus the sale at the end.

Since money in your pocket today is worth more than money in the future, real estate shows a higher IRR in this example.

Key Takeaways

IRR measures your annual growth rate, adjusted for timing.
Getting money back earlier boosts your IRR.
Real estate often looks better on IRR because of regular rental income.
Stocks may look lower on IRR if they only pay off when you sell.
But don’t forget: stocks are easier to buy and sell, while real estate is less liquid and requires management.

👉 IRR is not the only metric you should use, but it’s one of the best tools for putting different investments—like real estate and stocks—on the same playing field.

Jay Wu