IRR is the canonical institutional real estate return metric. It captures both the magnitude and timing of cash flows. A 15% IRR over 5 years is a 15% annualized return that respects when cash flows occurred (early cash flows weighted more than late ones).
IRR is most useful for value-add and development deals where cash flows are uneven. For stabilized properties with steady cash flow, cap rate and cash-on-cash are simpler. IRR is also the metric institutional LPs care most about when underwriting GP track records.
For coliving operators, IRR underwriting requires modelling: (1) acquisition + capex spending pattern, (2) lease-up curve to stabilization, (3) stabilized NOI, (4) exit cap rate at the chosen hold period. Sensitivity to exit cap rate is typically the biggest variable.
For coliving-specific IRR underwriting, four sensitivity dimensions matter most. (1) Exit cap rate: a 50bps swing on a 5-year hold typically moves IRR 200-400bps. (2) Stabilization timing: 6 vs 18 months lease-up moves IRR 300-500bps for development deals. (3) Stabilized NOI margin: a 5pp swing (e.g., 22% vs 27%) moves IRR 250-450bps. (4) Hold period: extending a deal from 5 to 7 years compresses IRR if stabilized cash flow doesn't compound, many GP track records flatter than they appear because they cherry-pick 5-year holds for IRR optics. Sponsor track records get sliced both ways; LPs increasingly demand vintage-adjusted, weighted-average IRR across the entire portfolio rather than headline numbers on selected deals.
Formula
IRR is the rate r where Σ Cash Flow_t / (1 + r)^t = 0
Worked example: 5-year hold: Year 0 = -€2M (acquisition + capex). Years 1-4 NOI = €100k, €180k, €240k, €280k. Year 5 = €290k NOI + €4.2M sale proceeds. IRR ≈ 15.3%. If exit cap rate compresses 50bps (lower exit cap = higher exit price): IRR jumps to ~17.5%.
In the field
Institutional coliving fund IRR targets: Western markets 10-15% (lower, larger deals, more capital chasing). Emerging markets 15-22% (higher, smaller deals, more risk premium). Operator-led GP funds typically need 18%+ deal-level IRR to deliver target LP returns after fees.
Common pitfalls
- ×Reporting IRR on a single deal as if it represents portfolio performance, single-deal IRRs are noisy.
- ×Modelling unrealistic exit cap rate compression, the same flatter IRR can be achieved by structurally low exit caps.
- ×Confusing project IRR (deal-level) with equity IRR (after debt), they're very different.
- ×Not stress-testing for delayed lease-up, IRR is heavily sensitive to the timing of the lease-up curve.