As you are starting this real estate investment journey, you will begin to hear and
see many different words all the time when it comes to these investments. It is
important that you to understand what they mean and how they impact your
investment goals. This will be a four part series of blogs to give you a better
understanding of what these real estate investments are. We will be covering
different investment metrics, financing types and terms, apartment financial key
terms and a brief overview of apartment financial statements.
Let dive into the first part about the different investment metrics. There are four
types of metrics to look at when considering a real estate investment. The four
- Cash on Cash Return
- Average Annual Return
- Equity Multiple Internal
- Rate of Return
Cash on Cash Return
Cash on cash return in multifamily real estate investing typically means the total
amount of cash flow in year 1 compared to the total amount of cash invested in the
property. This is used to help forecast projected earnings and expenses. This metric
is used for the current year period and not used for the life of the investment.
Cash on Cash Return = Annual Cash Flow / Total Investment
Average Annual Return
Average annual return means the historical average annual return of profit in a
particular investment over a period of 3-10 years. This can help you determine the
performance of a particular real estate investment but it is not the end all be all for
evaluating. To know if one return is good or not, one needs to have more context
this particular investment and comparisons of a similar type of investment.
Average Annual Return = Net Overall Investment Profit / (Total Investment * Hold Period in Years)
The equity multiple is defined as the net overall investment profit plus total
investment divided by the total investment. The equity multiple is based on the
profit of your investment which does not include your original investment. This
term is easily confused because there are syndicators who include your original
investment when calculating the equity multiple.
Equity Multiple – (Net Overall Investment Profit + Total Investment) / Total Investment
Internal Rate of Return (IRR)
The internal rate of return is a metric used to see the profitability of a potential
investment. Think of it as the rate of growth an investment is projected to generate.
While the actual rate of return will differ from the estimated IRR, usually an
investment with a higher IRR value compared to other investments would provide a
better chance of strong growth. IRR uses the time value of money calculation.
|Time Value of Money
|Cash on Cash
|Avg. Annual Return
|Internal Rate of Return
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