How to calculate a hotel's IRR

Two different IRRs — do not conflate them

Project IRR (unlevered) is the return of the asset itself, as if bought 100% in cash: cash flow from the initial investment, through each year's NOI, to the exit value. It does not depend on how the purchase is financed.

Equity IRR (levered) is the return to whoever puts up the equity, after debt service. With reasonable leverage, equity IRR runs higher than project IRR — the "leverage effect" — but it is also more sensitive: a NOI drop hits equity first, not the debt.

The four inputs that move IRR

1 · Entry price — the more you pay for the asset, the lower the IRR, all else equal; it is the single heaviest variable.

2 · Debt structure — LTV (loan-to-value), cost of debt and amortisation schedule. More LTV and lower cost raise equity IRR (within reasonable risk limits).

3 · Projected NOI — the net operating income of each year in the horizon (typically 5 years), driven by ADR, occupancy and the asset's USALI cost structure.

4 · Exit multiple / cap rate — the rate used to capitalise the exit year's NOI into an exit value. An exit cap rate higher than the entry one (reverse compression) hurts IRR even if NOI grew.

A worked example with real, dated, sourced figures

Spain's prime hotel yield held at 5.0% in Madrid and Barcelona through 2025 and early 2026 (source: CBRE, "Figures Hoteles", Q3 2025 and Q1 2026). An asset that enters near that reference cap rate and exits five years later at a similar rate (no compression or expansion) earns an IRR explained almost entirely by NOI growth over the period — the "neutral" scenario used as an anchor before stress-testing occupancy, ADR or financing assumptions.

The average price per room in existing-hotel transactions in Spain was €183,100 in 2025 and rose to €213,300 in H1 2026 (source: Colliers, Spain hotel investment reports 2025 and H1 2026) — the figure that sets a comparable's entry price before projecting IRR, the same reference used in the CompSet guide.

How HotelVALORA solves this

The report's full underwriting computes project IRR and equity IRR together, with an editable debt structure (LTV, cost, amortisation, grace period) sitting on top of the 5-year USALI P&L — instead of a generic spreadsheet. The goal_seek tool runs it backwards: given a target IRR, it returns the maximum entry price that achieves it — useful to defend or challenge an asking price with the same engine, not a gut feeling.