“I bought this property for $200K, and now it’s worth $1 million.”
Sound familiar? These kinds of stories are everywhere—at parties, barbecues, and on social media. A 5x return grabs attention instantly. It sounds incredible, and your brain loves it because it’s simple: “Big number = good investment.”
But here’s the problem. That headline number only tells half the story. What’s missing? Time.
The real question is: How long did it take to achieve that 5x? Because the longer it took, the less impressive that return becomes. This is where IRR (Internal Rate of Return) separates itself as the metric that actually matters.
IRR: Annualised Returns and the Power of Compounding
IRR measures the annualised return of an investment. It’s not just a snapshot of your final number—it tells you how efficiently your investment compounds over time.
The magic of IRR is that it follows the same principles of compounding wealth that make long-term investing so powerful. If your investment generates higher annual returns, those returns build on themselves year after year, exponentially growing your wealth. One of the principles I live by is “The easiest way to build wealth is slowly” by taking advantage of compound investing.
This is why time—and the speed at which you achieve your returns—matters so much. The faster your money grows, the harder compounding works for you.
Two Properties: Same Multiple, Different IRRs
Let’s look at an example of two investments:
- Property A: You invest $200K and sell for $1M after 20 years.
- Property B: You invest $200K, receive $10K annual rental income, and sell for $500K after 7 years.
At first glance, Property A’s 5x multiple looks like the better deal. But when we calculate the IRR, the truth emerges:
- Property A IRR: 8.4% annually
- Property B IRR: 17.5% annually
Despite Property A’s bigger headline number, Property B generates a far higher annual return. Why? Because Property B delivers faster growth, regular income, and a quicker exit, allowing compounding to work harder and earlier.
This is the power of understanding IRR—it reveals the true performance of your investment over time and shows how effectively it compounds your wealth.
Why IRR Matters: Compounding and Capital Efficiency
- IRR Reflects Compounding Growth: IRR measures how your returns build on themselves annually, which is the essence of wealth creation.
- It Compares Investments Fairly: Two investments with similar outcomes can look very different when you consider time and compounding.
- It Highlights Opportunity Costs: Slow-growing investments tie up capital, reducing your ability to reinvest and compound elsewhere.
Conclusion
Don’t Be Fooled by Big Multiples
Big multiples sound impressive, but they don’t tell the whole story. The real measure of an investment’s success is its annual return (IRR) and how effectively it compounds your wealth.
So next time someone brags about turning $200K into $1M, don’t just nod along. Ask yourself:
- How long did it take?
- What’s the IRR?
Because the best investments don’t just grow big—they grow fast, they compound, and they build wealth efficiently.
TheBucket 