📊 Definition
Unlevered IRR is the internal rate of return on a property as if purchased with 100% equity (no debt). It measures the property's underlying performance independent of financing structure.
The Formula
Includes: purchase price (-), annual NOI (+), sale proceeds (+), no debt service
Example Calculation
A 5-year value-add investment (all-cash basis):
Where Does the Data Come From?
Calculate unlevered IRR from property-level fundamentals:
- Initial Investment: Purchase price + closing costs + all CapEx (no loan proceeds)
- Annual Cash Flow: NOI only (no debt service deduction)
- Sale Proceeds: Sale price - closing costs (no loan payoff)
- Ignore: All financing (loans, refinances, debt service)
Use Excel IRR function: =IRR(year0:yearN) with all-cash assumption.
Who Uses This Metric?
Asset Managers
Evaluate property quality independent of capital structure. A property with 8% unlevered IRR is fundamentally better than one with 6% unlevered IRR, even if leverage makes the 6% property show higher levered returns.
Acquisitions Teams
Compare properties fairly. Unlevered IRR removes financing differences—shows true property performance. Helps identify which assets create value vs. which just benefit from leverage.
REITs & Institutional Investors
Report unlevered returns to show portfolio quality. REITs have leverage at corporate level, so property-level unlevered returns show asset performance. Also useful for portfolio companies with varying leverage across properties.
Why This Metric Matters
1. Pure Asset Performance
Unlevered IRR shows property quality without financing effects. You can make a mediocre property look great with 85% LTV leverage. Unlevered IRR reveals if the asset truly performs or if returns are just leverage.
2. Comparable Across Capital Structures
Compare properties with different leverage levels. Property A: 18% levered IRR at 80% LTV (7% unlevered). Property B: 15% levered IRR at 60% LTV (9% unlevered). Property B is fundamentally better despite lower levered IRR.
3. Leverage Risk Assessment
Gap between unlevered and levered IRR shows leverage dependency. Small gap (8% unlevered, 12% levered) = conservative leverage. Large gap (6% unlevered, 20% levered) = high leverage risk—vulnerable if property underperforms.
💡 Pro Tip
Target unlevered IRR > cost of debt for sustainable returns. If unlevered IRR is 5% and debt costs 6%, leverage destroys value. Compare against cap rate as a related benchmark. Need unlevered returns 2-3% above debt cost for healthy levered returns—6% unlevered with 4% debt yields solid levered IRR.
If you're tracking unlevered and levered IRR across dozens of properties, BubbleGum BI can calculate both automatically from your PMS data and surface outliers at the portfolio level. See how the platform handles this metric alongside NOI, occupancy, and renovation ROI on a short walkthrough.
Frequently Asked Questions
What's a good unlevered IRR for multifamily?
Core/stabilized: 6-8%. Value-add: 8-11%. Opportunistic/development: 11-15%+. Lower than levered IRR because there's no debt amplification. Strong unlevered returns indicate quality assets that perform well regardless of financing.
Should I report levered or unlevered IRR to investors?
Both. Levered IRR shows actual equity return (what investors earn). Unlevered IRR shows property quality (underlying performance). Sophisticated investors want both—levered for returns, unlevered to assess leverage risk and asset quality.
How do I calculate unlevered IRR from levered?
Start with all-cash assumption: add debt service back to annual cash flows, add loan proceeds to Year 0 investment, subtract loan payoff from sale proceeds. Result is all-equity scenario. Use IRR function on adjusted cash flows. Or model property without any debt from the start.
Why would someone report unlevered returns?
Shows property performance independent of capital structure. Useful for: REITs (leverage at corporate level), institutional investors (want to see asset quality), performance measurement (removes financing noise). Also useful when comparing properties with vastly different leverage levels.
Can unlevered IRR be higher than levered?
Yes—when debt cost exceeds property returns. If unlevered IRR is 5% but debt costs 6%, levered IRR will be lower (leverage destroys value). Avoid overleveraging properties where unlevered returns don't justify debt cost. Property must earn more than cost of debt for positive leverage.
Understand True Property Performance
BubbleGum BI calculates both levered and unlevered IRR via our financial dashboard—helping you assess property quality independent of financing structure.
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