Internal rate of return, or IRR, is the annualized rate of return that sets the net present value of an investment's entire stream of cash flows, including the initial outlay, interim distributions, and final sale proceeds, equal to zero. Unlike a simple average return, IRR accounts for the timing of cash flows, so a dollar received earlier in a hold period is worth more to the calculation than a dollar received later.
Because timing matters so heavily, IRR can sometimes be higher for a deal with faster distributions and a shorter hold even if the total dollars returned are similar to a slower-paying alternative. That sensitivity is one reason experienced investors read IRR alongside other measures, a comparison covered in more depth in this overview of common real estate return metrics, rather than relying on IRR as a single, standalone number.
Further reading: An Investor's Guide to Real Estate Return Metrics
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