IRR (Internal Rate of Return) and XIRR (Extended Internal Rate of Return) are both ways of measuring the performance of an investment over time - but they differ in how they treat the timing of cash flows.
IRR – Assumes Even Timing
- IRR assumes that all investment cash flows (capital in and returns out) happen at regular, evenly spaced intervals—like annually or monthly.
- This is useful in theoretical models, but often doesn’t reflect real-life property investments where cash flows can be irregular.
XIRR – Takes Real Timing Into Account
- XIRR is a more flexible and realistic measure, because it factors in actual calendar dates of when money was invested and when returns were received.
- It is the more accurate way to measure performance for property investments, where the timing of rental income, dividends, and sale proceeds can vary.
Example
Let’s say you invest R10,000 in a property on 1 January 2022.
- You receive R500 in income on 15 July 2022.
- Then receive R11,000 when the property is sold on 28 February 2023.
What IRR does:
- IRR assumes the R500 and R11,000 came in at neat, regular intervals (e.g., annually or semi-annually), not accounting for actual dates.
- It may underestimate or overestimate the return depending on how far off the timing is.
What XIRR does:
- XIRR looks at the exact dates of your investment and each return, and calculates a return that accurately reflects the time value of money.
- In this example, your XIRR might be around 60% annualised, reflecting the short holding period and the strong return.