Real Estate Investment Metrics

As with any investment, there are certain metrics that need to be calculated and considered when evaluating whether or not an opportunity is one that will give investors a lucrative return on their money. The metrics below provide invaluable information for syndicators and paint a picture about the overall profitability of an investment opportunity.

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Cash on Cash Return (COC)

Cash on cash return, or COC, measures the amount of cash flow an asset is projected to pay annually relative to the amount of initial cash invested. This value is expressed as a percentage of invested capital. For example, an investment property costs $1,000,000. A total of $150,000 cash is invested and the remaining is financed. To calculate the COC, divide the annual cash flow by the initial amount of cash invested. Let's assume the annual cash flow is $50,000.

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$50,000 / $150,000 = 0.33 or 33%

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The COC in this investment opportunity is 33%. This is higher than we typically see for a multifamily real estate syndication. As long as the other metrics are favorable, real estate investors generally find opportunities with a COC between 6% - 10% to be agreeable in today’s market.

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Internal Rate of Return (IRR)

The Internal Rate of return, or IRR, is the value used to measure an investment's performance over the full life of the investment. The IRR is impacted by the hold time of the investment, cash flow received, and proceeds from any capital event (refinance and/or sale). An acceptable IRR for a multifamily investment is typically 12% - 15%.  Above that would be considered exceptional performance.

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Equity Multiple

The equity multiple expresses how many times an initial investment is expected to be regained on an investment. For example, if $50,000 is invested into an asset with an equity multiple of 2, then $100,000 would be regained from the asset.

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Class of Shares

The class of shares an investor has in a syndication is largely dependent on their intentions and goals for the invested money, as well as the amount of risk they are willing to take on in the investment.

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Equity Shares - Equity investors keep their capital in the deal until the sale of the asset and receive a portion of the sale proceeds that is directly correlated to their percentage of the overall capital invested.

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Debt Shares - Debt investors receive a predetermined interest rate on their investment and are paid that amount until the end of a predetermined period of time. They do not receive a portion of proceeds when the asset is sold.

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It is sometimes possible for an investor to place capital in both the debt and equity shares within the same deal.  In addition, some offerings will include additional classes of shares for large amounts of invested capital, over a specific monetary threshold.

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As you can see, the evaluation of a syndication requires that many components be considered. It requires a knowledgeable sponsor who can look at all aspects of a deal to determine if it's the right one to pursue.

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Disclaimer: The information provided in this post is for educational purposes only and should not be considered as advice. Always consult with a qualified professional before making any financial decisions.