All investors should know key metrics when investing in a real estate syndication 👩💻👨💻
See below for some of the most important metrics and how they are calculated:
1: Preferred Return (Pref) 💰 : This is the minimum rate of return that must be achieved before any profit distribution is made to the sponsors or managers. It's typically expressed as a percentage of the initial investment.
Formula: (Initial Investment) x (Preferred Return Rate)
Example: If the preferred return is 8% and the initial investment is $100,000, the preferred return would be $8,000.
2. Cash-On-Cash Return (CoC) 💸 : Measures the annual return earned on the actual cash invested in the property. It's useful for assessing the income-generating potential of the investment.
Formula (Annual Cash Flow Before Tax) / (Total Cash Invested)
Example: If the annual cash flow before tax is $10,000 and the total cash invested is $100,000, the cash-on-cash return would be 10%.
3. Internal Rate of Return (IRR) 📈 : IRR represents the annualized rate of return an investor can expect to receive on their investment over its holding period. It accounts for the time value of money and considers both the magnitude and timing of cash flows.
Formula:
A. Internal Rate of Return (IRR) = (Future Value ÷ Present Value)^(1 ÷ Number of Periods) – 1
B. Less complicated version go to excel OR google sheets use the IRR function
Example:
Cell Range
A1 = -100,000
A2 = 12,000
A3 = 12,000
A4 = 12,000
A5 = 125,000
=IRR(A1:A5) = ~15%
4. Equity Multiple (EM) ✖ : This metric measures the total cash an investor will receive over the life of the investment compared to the total cash invested.
Formula: Total Cash Distribution / Total Equity Invested
Example: If the total cash distribution over the investment period is $200,000 and the total equity invested is $100,000, the equity multiple would be 2x.
Understanding these return metrics will help investors effectively evaluate real estate investments' performance and profitability.
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