Levered vs Unlevered IRR in Apartment Deals: What Each One Tells You
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Unlevered IRR is the internal rate of return on an apartment building as if it were bought entirely with cash: the purchase price out, the net operating income in each year, and the sale proceeds at the end. Levered IRR is the return on the equity alone, after the loan funds part of the price, the loan payments come out of income and the loan is repaid at sale. Unlevered IRR tells you whether the building is a good investment. Levered IRR tells you what the debt does to that return. A third number, the investor (LP) net IRR, is lower still, because fees and the sponsor's share of profits come out of the levered cash flows.
This post is part of our guide to real estate syndication. It runs one building through four scenarios. Figures are as of November 2026 and the example is illustrative.
How is each one calculated?
| Measure | Money in | Money out each year | Money out at the end |
|---|---|---|---|
| Unlevered IRR | Full price and costs | NOI, less capital spending | Sale price less selling costs |
| Levered IRR | Equity only (price and costs less the loan) | NOI less loan payments and capital spending | Sale proceeds less the loan payoff |
| LP net IRR | The investors' equity | Distributions to investors | Investors' share of sale proceeds, after the waterfall |
The IRR is the discount rate that makes the present value of all these cash flows equal zero. A spreadsheet's IRR or XIRR function does the math; see XIRR for syndication investors.
A worked example: one building, three loans
A building is bought for $10,000,000 with $600,000 of NOI (a 6.0% cap rate). NOI grows 3% a year, and the building sells at the end of year 5 at a 6.0% cap rate on year-6 NOI, less 2% selling costs, for about $11,361,000. The levered cases borrow $6,500,000 on interest-only payments, so the equity is $3,500,000. Closing costs, capital spending and fees are left out to keep the math visible.
| Case | Year-1 cash-on-cash | IRR | Equity multiple |
|---|---|---|---|
| Unlevered (all cash) | 6.00% | 8.63% | 1.45x |
| Levered, loan at 5.0% | 7.86% | 14.59% | 1.83x |
| Levered, loan at 6.5% | 5.07% | 12.12% | 1.70x |
| Levered, loan at 7.5% | 3.21% | 10.48% | 1.60x |
Look at the last row. Year-1 cash flow is lower than the all-cash yield (negative cash leverage; see negative leverage), yet the levered IRR is still higher than the unlevered IRR. That is because the building's whole return, 8.63% including the sale, beats the loan's 7.5% cost. The test for IRR is the unlevered IRR against the cost of debt, not the cap rate against the loan constant.
What happens in the downside case?
Change one assumption: the building sells at a 7.0% cap rate instead of 6.0%, for about $9,738,000.
| Case | IRR |
|---|---|
| Unlevered | 5.88% |
| Levered, loan at 6.5% | 4.72% |
Now the unlevered IRR (5.88%) is below the cost of debt (6.5%), so the loan lowers the return instead of raising it. In the base case the same loan added about 3.5 points of IRR; in the downside it took away about 1.2. A bigger loan, a higher rate or a larger drop in the sale price makes the swing wider, and at enough leverage investors can lose part or all of their money. See what happens if a syndication loses money.
Why ask for the unlevered IRR?
Because it isolates the building. Two deals can show the same levered IRR, one because the building is strong and one because it uses a lot of cheap, short-term or interest-only debt. The unlevered IRR separates them. Questions to ask:
- What is the unlevered IRR in the base case and the downside case?
- What is the all-in cost of the debt, including fees and the rate cap?
- How much of the levered IRR comes from the sale versus the yearly cash flow?
- What is the LP net IRR after fees and the sponsor's share? See the syndication waterfall.
- What exit cap rate does the model use, and how does it compare with the going-in cap rate? See the exit cap rate assumption.
For how IRR relates to equity multiple and cash-on-cash, see equity multiple, IRR and cash-on-cash. Projected returns are estimates, not promises.
How DoorRaise fits in
DoorRaise helps sponsors raise the equity for apartment buildings with 5 or more units from their friends and followers. The deal page shows investors projected returns that DoorRaise computes from the sponsor's inputs, after DoorRaise's fees, with the assumptions shown. DoorRaise forms the deal's LLC, prepares the offering documents, files Form D and verifies every investor's accreditation, in 506(b) and 506(c) deals. Investors fund by wire into escrow at Enterprise Bank & Trust. DoorRaise charges two flat fees: $1,500 to set up (non-refundable) and $5,000 a year for administration, the first year paid at closing from the money raised and only if the deal closes.
See how the money is shared after the loan with the free profit split tool, or start your deal.
FAQ
What is the difference between levered and unlevered IRR?
Unlevered IRR is the return on the property bought with cash. Levered IRR is the return on the equity after the loan funds part of the price and is repaid from income and the sale.
Is a higher levered IRR always better?
No. It can come from more or riskier debt rather than a better building. Compare it with the unlevered IRR and look at the downside case.
When does leverage increase IRR?
When the property's unlevered IRR is higher than the all-in cost of the debt. When the unlevered IRR falls below that cost, leverage lowers the IRR.
What IRR do investors in a syndication actually receive?
The LP net IRR, after the sponsor's fees and share of profits. It is lower than the deal's levered IRR. Ask the sponsor for it separately.
Can levered IRR be higher even with negative leverage in year 1?
Yes. Year-1 cash flow can be below the all-cash yield while the full return, including the sale, still beats the cost of debt. The reverse can also happen.
Sources
- SEC, Investor.gov: investor bulletin on private placements under Regulation D
- Fannie Mae Multifamily, fixed-rate mortgage loans
This article is general information, not legal, tax or investment advice. The example building, loans and returns are illustrative and not a projection for any deal. DoorRaise is not a lender, law firm, broker-dealer, investment adviser or funding portal.