IRR vs. NPV - Which To Use in Real Estate [& Why] // If you take any basic corporate finance class in college or grad school, one of the first concepts you’re going to learn is the Net Present Value (NPV) analysis, and how to use that analysis to make decisions on investment opportunities you might be considering.

However, a very close relative to the NPV calculation is the Internal Rate of Return (IRR), and some of the most frequently asked questions we receive in our courses and Break Into CRE Academy are around which metric to use in an analysis, and why one might be preferable over the other.

The NPV and IRR are both unique in that these are both time value of money functions, where cash flows received earlier on in the analysis period are worth more than those same cash flows received later on in the analysis period.

However, even though these metrics are similar in their mechanics, the end products of these calculations look substantially different from one another, making one of these metrics far more helpful in real estate analysis, especially when presenting to investors.

So to answer a frequently asked question that you might also have, in this video, we'll break down what the IRR and NPV each actually are, how these two metrics play together (from a real estate standpoint), and which metric tends to win out when it comes to real estate financial modeling and valuation.

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Research and articles referenced in this video:

https://fred.stlouisfed.org/graph/?g=8dGq