Internal Rate of Return

Internal Rate of Return — a widely used profitability metric that accounts for both the timing and magnitude of every cash flow associated with a note investment, including the purchase price, monthly payments received, any workout or legal costs, and the final payoff or liquidation proceeds. Unlike simple return calculations, IRR captures the time value of money, making it especially useful for comparing notes with different payment schedules, hold periods, or resolution timelines.

For secondary market note investors, IRR is often the go-to benchmark for evaluating deals. A performing note purchased at a modest discount might show a steady IRR in the low double digits, while a non-performing note acquired at a deep discount could project a much higher IRR if the investor successfully completes a loan modification or foreclosure within the expected timeline. Because IRR is sensitive to when cash flows occur, delays in resolution can significantly reduce the actual return.