WHEN IRR BEATS CGAR

Let’s explore an insightful way to evaluate returns from real estate investments — the Internal Rate of Return (IRR).

Like the Compounded Annual Growth Rate (CAGR), IRR expresses profitability as a percentage.

But while CAGR assumes a single buy-and-sell event (start vs. end values), IRR is far more flexible. It factors in all cash inflows and outflows over time — including staggered payments, rent, resale proceeds, or even interim costs — then determines the exact discount rate that makes the total Net Present Value equal to zero. That’s what makes IRR a favorite among analysts and fund managers.

Let’s illustrate.

Suppose a buyer considers a P10 M pre-selling lot that will turn over in four years. He expects it to appreciate 5% annually to P12.155 M, at which point he plans to sell. The developer offers two payment schemes:

Option A: 8% discount if he pays 100% upfront.

Option B: Staggered payments — 10% down, 10% spread over 48 months, and 80% upon turnover.

Which is better?

A simple CAGR analysis says Option A wins — 7.2% = [( P12.155M / P9.2M) ^ (1 / 4 years)] - 1

vs.

Option B’s 5.0% = [( P12.155M / P10M )^( 1 / 4 )]-1

But that’s misleading, because CAGR ignores how the buyer pays–specifically the timing.

In real estate, you start earning even on the portion you haven’t fully paid for. The developer doesn’t say, “You've only paid for 20%, so you get only 20% of the appreciation.”

Moreover, the staggered payment allows the buyer to deploy the P9M he hasn’t paid yet into other investments (like time deposits), further boosting overall money generated.

That’s where IRR shines. It captures the timing of each peso paid — every partial payment and final sale — showing the true rate of return across time.

Running the numbers reveals a striking result: Option B’s IRR is roughly 27%, versus Option A’s 7.2%.

Put differently, the developer would have to grant about a 54% discount on the upfront payment just to match the return from the staggered plan.

Moral: CAGR tells you how much your asset grew. IRR tells you how smartly your money worked along the way.