Trying to calculate internal rate of return (IRR) manually is not very practical for income property investors (or anyone else for that matter) because the internal rate of return calculation involves tedious mathematical solutions that take a lot time. Even the most skilled investment real estate specialist probably wouldn’t know the internal rate of return formula and instead would use a time value calculator or real estate software program to compute it.
So I’ll ignore the actual formula (it can be found in other places on the web) and instead resort to a simple example. Let’s suppose you have $100,000 to invest in a rental income property and plan to hold it for five years. Moreover, during the period of those years you plan on receiving five annual cash flows and then an amount of additional money from the sale of the property. When you find the unique rate that discounts the sum of these future cash flows until it equals the initial investment, you will have the IRR.
