The Death of IRR
Why Every Real Estate Pitch Deck is Lying to You
IRR is voodoo math that tells a story, not THE story.
I learned this the hard way. After nine years on Wall Street and countless real estate deals, I've watched IRR projections seduce investors into terrible decisions more than any other single metric. The problem isn't that IRR is wrong—it's that it's become a weapon of mass distraction, pulling focus away from what actually determines investment success.
Here's what I wish someone had told me before I started chasing those glossy 25% IRR projections: they're not predictions. They're marketing tools that do attempt to show you a targeted return, but it’s just that, a target.
And it isn’t even what it says.
The Great IRR Deception
Walk into any real estate investment presentation, and you'll see it immediately. The slide everyone's been waiting for. Bold fonts, confident projections, maybe even a small disclaimer buried in 8-point type at the bottom.
"Projected IRR: 22.5%"
The room nods approvingly. Investors lean forward. This is what they came to hear.
But here's what that slide doesn't tell you: IRR makes assumptions about your money that exist nowhere in the real world.
The Reinvestment Fallacy
IRR's fatal flaw is mathematical.
The metric assumes that every dollar you receive from the investment can be immediately reinvested at the same rate of return. This assumption is baked into the calculation so deeply that most people never question it. I doubt most investors (and sponsors) even realize this.
Think about what this means in practice.
Your real estate syndication projects a 25% IRR. In year two, you receive a $50,000 distribution. According to IRR math, you'll immediately find another investment that returns 25% annually and put that $50,000 to work.
In what universe does this happen?
More likely, that $50,000 sits in your bank account earning 0.5% while you spend six months evaluating the next deal. Or you invest it in something safe and liquid, earning 4-5%. The IRR calculation doesn't care. It assumes perfection—that you have an infinite pipeline of identical high-return opportunities.
This isn't a small technical issue.
You can solve for this, of course, by utilizing another metric. We call it the MIRR (Modified IRR), which allows you to dial in a “real” reinvestment rate of return.
Here’s a fun little chart I made for you all.
Two different scenarios - fairly standard deal, you get a 5% cash yield approximately per year, and a nice little exit. Voila - 18.31% IRR. MIRR at a 3% reinvestment rate (some money market fund) drops your return profile by about 1%.
But what happens if you have one of these fun early return deals (more on this below)? Here, the MIRR really bites because it's assuming that you took that $50k and you ploughed it right into something that was also generating a 24.45% return. Unlikely.
See?
The Front-Loading Game
Savvy sponsors understand IRR's psychology. They know that investors compare deals based on projected IRR, so they optimize their structures accordingly. The result is a systematic gaming of the metric that would be illegal in public markets but passes for standard practice in private real estate.
Here's how it works:
Early distributions create IRR magic. A sponsor who returns 20% of your investment in year one automatically boosts the IRR, even if that money came from your own capital contribution. You're literally getting your own money back, but IRR treats it as a return.
Exit timing assumptions become increasingly aggressive. Why model a realistic 7-year hold when a 5-year exit pumps the IRR? The sponsor isn't lying—they're just optimizing for the metric that raises capital.
The tragedy is that these games often create worse actual investments. A deal structured to maximize IRR might sacrifice long-term cash flow, ignore market fundamentals, or take unnecessary risks. But it gets funded because the IRR looks compelling.
The Psychology of IRR Addiction
Why do intelligent investors fall for this? Because IRR feeds our worst behavioral biases.
It satisfies our need for simple comparisons. One deal shows 18% IRR, another shows 25%. Obviously, 25% is better, right? This thinking ignores risk, timing, market conditions, and sponsor quality—everything that actually determines success.
It makes speculation feel like analysis. Projecting future cash flows is inherently speculative, but IRR gives those projections the appearance of mathematical precision. We mistake modeling for forecasting.
It rewards optimism over realism. Conservative assumptions produce lower IRRs. Aggressive assumptions produce higher IRRs. Guess which ones get funded?
I've watched experienced investors—people who would never buy a stock based solely on earnings projections—make real estate decisions almost entirely based on IRR. The cognitive dissonance is staggering.
What Actually Matters: The Metrics That Tell the Truth
After enough deals and enough disappointments, I've learned to focus on metrics that reveal rather than obscure reality.
Cash-on-Cash Returns
This is brutally simple: What percentage of my initial investment comes back to me as cash each year?
If I invest $100,000 and receive $8,000 in distributions, that's an 8% cash-on-cash return. No modeling required. No assumptions about future performance. Just math based on actual cash flows.
Cash-on-cash returns force sponsors to focus on fundamentals. You can't game this metric with clever structuring or optimistic exit timing. Either the property generates cash flow or it doesn't.
Equity Multiple
How much total cash will I receive compared to what I invested?
A 2.0x multiple means I get $200,000 back on a $100,000 investment. A 1.5x multiple means $150,000. This metric tells me about total wealth creation without the timing distortions that make IRR misleading.
Equity Multiples are particularly valuable because it forces honest conversations about exit assumptions. A sponsor projecting a 3.0x multiple needs to explain exactly how the property will triple in value. These conversations reveal whether the business plan is based on market fundamentals or wishful thinking.
Stress Testing: The Ultimate Reality Check
Before I consider any investment, I run it through scenarios that sponsors prefer not to discuss:
What if rents stay flat for three years?
What if interest rates rise and the exit cap rate increases?
What if the hold period extends to 10 years instead of 5?
What if construction costs double?
What if the sponsor needs to inject additional capital?
These questions reveal deal quality faster than any IRR projection. A good deal should survive bad assumptions. A great deal might even thrive despite them.
And by the way, just taking a deal to a 10-year cycle will usually torpedo the IRR. But it doesn’t mean it wasn’t a good outcome for everybody!
The Historical Context: Why This Matters Now
We're living through the aftermath of a decade-long IRR delusion. From 2010 to 2021, rising real estate values made almost every deal look brilliant in hindsight. Sponsors who bought average properties with aggressive financing earned reputations as investment geniuses. IRR projections that seemed laughably optimistic turned out to be conservative.
This success bred dangerous overconfidence. By 2021, I was seeing deals with projected IRRs that assumed everything would go perfectly—forever. Floating rate debt with thin interest coverage. Rent growth assumptions that required local economies to outperform Silicon Valley. Exit cap rates that assumed permanent yield compression.
When interest rates rose and markets cooled, these deals collapsed. Not because the sponsors were incompetent, but because they optimized for IRR instead of resilience.
The lesson isn't that IRR is evil. It's that treating IRR as gospel—the primary metric for investment decisions—is financial suicide.
A Better Way Forward
I've developed a simple framework that's saved me more money than any spreadsheet optimization:
First, ignore the IRR. Look at it if you want, but don't let it influence your decision.
Second, focus on the fundamentals. Is this a good property in a good location with good management? Would you want to own it for 10 years?
Third, stress test everything. Assume nothing goes according to plan. If the deal still works, it might be worth considering.
Fourth, follow the cash. Real wealth comes from distributions you can count on and a property that is attractive and people continue to gravitate towards.
Finally, ask the right question. Instead of "What's the projected IRR?" ask "If nothing goes according to plan, do I still get my money back?"
This last question has eliminated m ore bad deals from my pipeline than any other filter. It forces honest evaluation of downside protection, market fundamentals, and sponsor competence.
The Bottom Line
IRR isn't worthless, but it's dangerous when misused. In a world of infinite capital chasing finite deals, sponsors use IRR projections to differentiate their offerings. The metric has become a marketing tool disguised as financial analysis.
Real estate investing is about acquiring income-producing assets at reasonable prices and holding them long enough for time and leverage to work their magic. It's not about optimizing spreadsheets or chasing the highest projected returns.
The best real estate investors I know focus relentlessly on fundamentals: location, cash flow, basis, and downside protection. They buy properties they'd be happy to own forever and structure deals that work even when things go wrong.
That's not as exciting as a 30% IRR projection, but it's a lot more profitable in the long run.
What's the worst IRR projection vs. reality gap you've seen? I'd love to hear your war stories in the comments.