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.
- The IRR (Internal Rate of Return) in this investment scenario, assuming evenly spaced periods, is approximately 7.41% annualise, which would be understaded.
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, the XIRR would 13.16% annualised: This accurately reflects the time value of money, taking into account the exact dates of the cash flows.