My kids know what IRR stands for: Internal Rate of Return. They’re not old enough to use it in a sentence that would impress anyone, but they understand the concept, and that’s enough for now.
I’ve written before about why family is the best financial education a teenager can get. But after the response to those posts, I want to get more specific. The concepts that matter most in real estate investing—the ones that took me years to internalize—aren’t that hard to explain if you approach them honestly, without jargon.
IRR is a good place to start.
Why IRR Matters More Than “Profit”
I ask my kids: If I offered you $100 today or $110 in a year, which would you take?
Most kids say $110. Then I change the question: What if I offered $100 today, or $200 in 20 years?
That’s when it gets interesting. Suddenly, $110 in a year starts to look better than $200 in 20 years, depending on what else you could do with the money. That intuition- that time affects the value of money- is the foundation of IRR.
Internal rate of return is simply the annualized rate at which money grows across the life of an investment, accounting for when the cash flows actually happen. A deal that returns 2x your money in two years has a dramatically higher IRR than one that returns 2x over ten years, even though the multiple is identical.
Deals that look the same on paper often look very different when you account for time.
The Lemonade Stand Version
Here’s how I’ve actually explained it at the dinner table.
You invest $10 to start a lemonade stand. Over the summer, you make $3 in profit every month for three months. At the end of the summer, a neighbor buys your stand from you for $12.
You put in $10. You got back $9 in profit plus $12 from the sale — a total of $21 over three months. That feels like a great return. But for IRR, what matters isn’t just the total, but the timing of each cash flow. The money you got in month one is more valuable than the money you got at the end, because you could have put the month-one money to work somewhere else sooner.
IRR captures all of that in a single number.
Why It Matters in Real Estate
In commercial real estate, IRR is the benchmark investors use to compare opportunities with different holding periods, different cash flow structures, and different exit assumptions.
A value-add multifamily deal might project an 18% IRR over 5 years. A ground-up development might project a 22% IRR over 4 years, with no cash flow for the first two. A stabilized retail asset might deliver a 9% IRR with consistent distributions throughout.
Which is best? It depends entirely on your capital objectives, your liquidity needs, and what alternative investments look like. IRR gives you a common language to make that comparison honestly.
The mistake I see young investors make is chasing the highest IRR without understanding what assumptions are driving it. A projected 25% IRR built on aggressive exit cap rate assumptions and optimistic lease-up timelines is not the same thing as a 18% IRR grounded in conservative underwriting.
The number matters. The assumptions behind it matter more.
The Real Point
I don’t actually expect my kids to be underwriting real estate deals anytime soon. But I want them to understand, from an early age, that time is a variable in every financial decision they make. The sooner money works, the harder it works. Waiting has a cost, and that cost compounds.
That’s not a lesson about IRR. That’s a lesson about life.