Reverse IRR Calculation: How to Back-Solve Your Maximum Purchase Price from a Target Return

Calculate your max bid and required rent using NPV and PMT before negotiation.

Published on | Investment Analysis

This guide solves two specific problems:

  1. You want a specific return (e.g., 15%): What is the fair price to pay today?
  2. You've already invested: How much rent or payment should you charge to hit that target?

You have a hard rule: "I need a 15% annual return." But figuring out exactly how much to invest or how much to charge to hit that number can be tricky. Today, we'll calculate both using simple Excel formulas.

💡 What "Reverse IRR" Really Means:
"Reverse IRR" isn't a new metric. It simply means setting your target return first, then solving for price or cash flow. If the deal doesn't meet your number, you walk away. Simple.

Scenario 1: How much should I pay to get a 15% return?

Most textbooks teach you to calculate returns after you know the price. But in the real world, it's often the opposite:

  • Your Goal: "I want a 15% annual return."
  • The Deal: "This house rents for $3,000/month."
  • The Question: What is the max price I can pay to guarantee that 15%?

It's like walking into a car dealership knowing exactly your monthly budget. It gives you leverage.

How It Works (The Core Logic)

We're skipping the algebra class today. The logic is simple: money in the future is worth less than money today. If you want to earn 15%, every dollar you receive next year is only worth about $0.87 today.

Max Purchase Price = The sum of all future cash flows discounted to today

If you pay exactly that amount, you'll earn your 15%. If you manage to pay less, you'll earn even more! That's your margin of safety.

A Real-World Example: Buying an Apartment

Say someone offers you a small apartment to rent out. Your goal is a clean 10% annual return. The numbers look like this:

  • Net Rent: $7,200/year (after all expenses)
  • Future Sale (5 years): You expect to sell it for $120,000

The owner is asking $108,000. Is it a deal? Let's check.

Bringing the Future Money Back to Today

We discount every year's cash flow by your 10% target:

  • Year 1 ($7,200) is worth today: $6,545
  • Year 2 ($7,200) is worth today: $5,950
  • Year 3 ($7,200) is worth today: $5,409
  • Year 4 ($7,200) is worth today: $4,917
  • Year 5 (Rent + Sale = $127,200) is worth today: $78,981

The Verdict

Add them all up: $101,802.

Decision: The seller is asking for $108,000, but based on your 10% target return, you can't pay more than $101,802. That ~$6,000 gap is your negotiation buffer. If the seller won't come down, you walk away—because paying more means accepting a return below your target.

The Shortcut: Why we use NPV

You might ask: "I want to find the IRR, so why are we using an NPV calculator?"

Here’s a little finance secret: When you set a target IRR, the "fair price" you calculate is mathematically identical to the Net Present Value (NPV) of those cash flows.

So instead of guessing, we can use the NPV function in Excel to get the answer instantly.

The Formula: =NPV(your_target_rate, cash_flow_1, cash_flow_2, ...)

  1. Type your target rate in a cell: 10%
  2. List your cash flows below it: 7200, 7200... and 127200 for the last year.
  3. Run the NPV formula, and boom: that's your buy price.

* Note: This assumes cash flows fall at the end of the year. Early or monthly payments would slightly increase the NPV.

Don't want to open Excel?

Use our NPV Calculator. Put 10% in "Discount Rate", set Initial Investment to 0, and plug in the flows. The resulting "Net Present Value" is your max purchase price.

Scenario 2: I've already bought it. How much rent should I charge?

Picture this: "I just invested $500,000 in a small retail space. I want to get my money back in 4 years with a 12% IRR. How much rent should I charge each year?"

This is the classic lender asking "what's the monthly payment?"

Example: Buying a Shop for Rent, Target 12%

The stats:

  • Purchase Price: $500,000
  • Target IRR: 12%
  • Holding Period: 4 years
  • Future Sale Price: $550,000

What’s the annual rent required to make this math work?

The Magic Formula: PMT

We use the PMT function (Payment). Yes, the same one used for mortgages, but in reverse.

The Formula: =PMT(rate, nper, pv, [fv])

In Excel:

=PMT(12%, 4, -500000, 550000)

Note the signs:

  • 12% = Your target yield
  • 4 = Years
  • -500000 = What you paid (negative because it left your pocket)
  • 550000 = What you get back at the end (positive)

The Result

Excel spits out: $37,740.

That is the net annual rent you must collect. Anything less, and you're under 12%. Anything more, and you're beating the market.

What if I don't sell? If you plan to hold it forever, set the future value to 0. The formula becomes =PMT(12%, 4, -500000, 0).

👉 This means if you don't sell (no exit value), the rent required to hit the same 12% return skyrockets. That's why having an exit strategy makes the cash flow requirements much lighter.

For Lenders

If you lend $100,000 at 15% for 5 years:

=PMT(15%, 5, -100000)

Result: You need to collect $29,831 per year.

⚠️ Final Note: Formulas aren't Crystal Balls

Calculating a "Fair Buy Price" doesn't guarantee profit. The inputs themselves are uncertain:

  • Rent Uncertainty: Will you actually collect that rent? What about vacancy?
  • Exit Price Risk: Can you really sell for $55k in 4 years? What if the market dips?
  • Discount Rate Subjectivity: Does your 12% target adequately compensate for these risks?

The Bottom Line

Calculating the "Reverse IRR" is your best weapon for negotiation. You go from "I think it's expensive" to "For my numbers to work, I can only offer X."

So next time, before you haggle over the price, decide what return you want. The rest is just simple math.

Good luck with your next deal!

Want to double-check your math? Swing by our Free IRR Calculator.