Hotel Revenue Glossary · Financial

IRR (Internal Rate of Return)

The annualized rate of return an investor earns on a hotel investment, accounting for initial capital outlay, annual cash flows (NOI), and eventual sale proceeds. IRR captures the time value of money, unlike simple ROI which does not.

Why it matters: IRR is the benchmark that hotel investors use to compare opportunities. Revenue management performance directly affects IRR through its impact on NOI. A hotel that consistently outperforms its revenue budget delivers higher IRR to its investors.

Worked example: Two refurbishment options, both A$1.2 million of equity, both returning A$1.68 million in total. Option A pays A$560,000 at the end of each of three years; Option B pays nothing until a A$1.68 million exit in year three. Simple ROI is identical at 40%. Discount both at 12% and A is still worth A$1,345,000 against B's A$1,196,000 — a A$149,000 gap created purely by when the cash arrives. IRR sees that gap; ROI does not.

Common mistake: Assuming a strong trading year lifts IRR proportionally. The exit price carries far more of the return than any single year of cash flow, and that price reflects the buyer's view of forward NOI and the yield they will accept. A record year the market reads as a one-off event cycle moves the exit very little.

All glossary terms Capitalization Rate (Cap Rate) NOI (Net Operating Income) Asset Value Per Key