I am often asked – how do you measure the performance of your real estate asset? While there are numerous key performance indicators used to assess asset performance, in this quick tip article we focus on key return metrics that you will often come across when speaking with sponsors and reviewing various deal investment opportunities.
Cash on Cash Return (CoC) = cash income earned relative to the original cash investment. The original cash investment typically includes the down payment on a loan (if the property is financed), closing costs, CAPEX reserves, and operating reserves. For example, a property generating $10,000 in annual cash flow after debt service and an initial cash investment of $100,000, has a 10% cash on cash return.
A typical minimum CoC target for syndicated investments is 8-10%. It is not uncommon for the cash on cash return to be lower in Yr1-2, while the property is being updated.
Average Annual Return (AAR) = return on investment averaged over the hold period of the asset, measured as total distribution to members divided by the initial cost of the investment or cash investment. The total distribution to members is equal to cash flow after debt service less asset management fees, preferred return paid to the limited partners “LPs”/passive investors (if any), and excess cash flow paid to the entity owners (passive/LPs first and active/GPs second) based on their share of ownership. If the asset is refinanced, thereby returning a portion or all of the initial equity investment, this metric is less meaningful and in that scenario, it is generally better to refer to the Internal Rate of Return.
A typical minimum AAR target for syndicated investments is 13-15%. It is not uncommon for the average return to be lower in Yr1-2, while the property is being updated.
Internal Rate of Return (IRR) = this metric captures the full return of the investment including distribution to members (referenced above) coupled with the gain on sale after accounting for the time value of money. The timing of when cash flow is returned impacts the IRR. Therefore, the sooner you receive the cashback, i.e. the shorter the hold period, the higher the IRR. This metric is less relevant for long-term buy and holds JV deals (cash on cash return would be a better return gage for those long-term buys and holds).
A typical minimum IRR target for syndicated investments is 15-20%.
Equity Multiple (EM) = measured as total dollars received divided by total dollars invested. Total dollars received include the cash flow earned throughout the hold period of the asset coupled with the sale proceeds. For example, if you invested $100,000 and you received a total of $200,000 throughout the hold period of the asset including gain on sale, that means you achieved an equity multiple of 2.00x or in other words you doubled your initial investment.
A typical minimum EM target for syndicated investments is 1.50-2.00x.
Return On Equity (ROE) = Total Annual Return (Cash Flow + Principal Paydown + Appreciation) / Total Equity or in other words the net profit derived from the investment divided by the initial equity. Total Equity captures the initial investment (down payment and closing costs). Equity is a measure of how
much of your net worth you have tied up in a property, and the amount of cash you would have in the bank if you sold it today (after paying off the debt on the property).
Should you have any questions or want to learn more about real estate investing, please reach out to firstname.lastname@example.org.
Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.