Great IRR, No Cash Flow
A deal projecting a 20% IRR and 2.0x equity multiple with almost no cash flow — why back-end-loaded returns are fragile and what to check before you trust an IRR.
By Michael Laudino, LFO Capital LLC · Published 2026-06-16
This one screamed buy: a projected 20% internal rate of return and a 2.0x equity multiple over a five-year hold. On a one-line summary it beat almost everything else on the desk. The problem was hiding in where those returns came from.
Open the cash flows. Years one through three threw off almost nothing — a heavy value-add program meant rents were being repositioned while expenses and capital ran ahead of income, so cash-on-cash was near zero, even slightly negative after debt service. Most of the projected profit lived in year five: an exit underwritten at a cap rate 50 basis points tighter than the going-in cap, on a stabilized NOI that assumed the business plan landed exactly on schedule.
That's a return built almost entirely on the back end. And back-end-loaded returns are fragile, because IRR is exquisitely sensitive to the size and timing of that final number. Move the exit cap 50 basis points the wrong way — back to where you bought — and the terminal value drops sharply, dragging the IRR from 20% toward the low teens. Let the value-add slip a single year, and you've pushed the big cash flow further out, which IRR punishes harder than almost anything. The 2.0x equity multiple, meanwhile, barely moves: you still roughly double your money, just over more time. That divergence is the tell.
The lesson: a high IRR is not the same as a good deal, because IRR rewards getting money back fast and rewards big terminal exits — and a value-add story delivers neither until the very end. Always ask two follow-up questions of any IRR: how much of the return is in the exit rather than the cash flow, and how sensitive is the exit to cap-rate movement you don't control? Pair the IRR with the equity multiple and the year-by-year cash-on-cash. When the IRR is high but the cash flow is thin and the exit is doing the heavy lifting, you're not looking at a strong deal — you're looking at a leveraged bet on cap compression.
See it for yourself in the IRR & equity multiple calculator and the cap rate calculator.
Frequently asked questions
Why can a high IRR be misleading?
IRR weights both the timing and the size of cash flows, so a return driven by a large back-end exit can post a high IRR while delivering almost no cash along the way — and that exit is usually the assumption you control least.
IRR vs equity multiple vs cash-on-cash — which matters?
They answer different questions. IRR measures time-weighted return, equity multiple measures total dollars returned, and cash-on-cash measures annual income on your equity. Looking at all three together exposes deals that look good on one metric and weak on the others.
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