When you invest capital with a real estate syndication group there are a myriad of performance indicators that are used for an informative look as to what you can expect to get in return for your investment. Below is a breakdown of the 4 of the most common performance indicators you should be aware of and know before making an investment.
Internal Rate of Return (IRR)
IRR is defined as the discount rate that makes the net present value of all cash flows equal to zero. It is complicated to do with mental math. Simply put, the IRR is the annual growth rate the investment is expected to generate. Microsoft Excel has an IRR function that you can use as well to make calculating IRR easy. IRR is great for calculating annual return. Here are some IRR examples. The most important thing to keep in mind, for higher IRR you often will take on more risk and will need more time to meet these numbers, typically.
- Acquisition of stabilized asset – 10% IRR
- Acquisition and repositioning of ailing asset – 15% IRR
- Development in established area – 20% IRR
- Development in unproven area – 35% IRR
Cash-on-cash Return (COC)
Cash-on-cash return calculates income earned on a property. It is the annual return made on the property. COC is measured by the actual cash received divided by the amount of cash that remains in the investment. If you invested $100,000 in the first year, and got $7,000 back in the first year, you made a 7% COC Return. It is important to mention that COC does not include refinancing or proceeds from the sale of the asset. COC is a measure of income from operations in your syndication. Some real estate deals in the “value add” strategy may have none or lower cash flow in early years, be sure to ask your sponsor so you know what to expect as far as cash flow goes.
Equity Multiple is simple. It is a measure of how much you multiplied the cash you invested. It is calculated after the property has sold. It considers your COC return, refinancing and proceeds from the sale of the asset. You can calculate the equity multiple by dividing the distributions you made across the life of the investment, by the original investment. This is also a quick insight into how much money you get back on your investment if cash flow goals are hit.
Annualized Return is a calculation of the total profit you receive divided by the money you contributed to the deal, then divide that result by how many years you were invested into this deal.
I hope this quick rundown was helpful and gives you some insights into some of the most common performance indicators when analyzing apartment syndication deals.