Financial Metrics to Look For as a Passive Investor
by Yarusi Holdings LLC on
Becoming a passive investor in a syndication is a great way for investors to gain exposure to real estate and grow their nest egg without having to deal with the day-to-day operations that come with managing a building. Investors benefit by sharing the cash distributions throughout the life of the project. Here are the three most common financial metrics investors can look for to make an informed investment decision:
- Cash-on-cash return
- This metric is derived by dividing the annual cash flow by the amount of equity initially invested to understand the return on investment. It is useful to calculate the amount of income/cash flow an investor will earn on a given investment.
- For example, if an investor puts in $100,000 and receives $8,000 in distributions the first year, their cash-on-cash return would be 8%.
- Most commonly, a “good” cash-on-cash return in multifamily real estate will range from 7-10%.
- Equity Multiple
- The equity multiple tells how much the investor multiplied their initial investment. It is calculated by adding up the total amount of distributions, including sale proceeds divided by your initial investment.
- For example, if an investor put in $100,000 and received $200,000 by the end of the investment, it would equate to a 2.0x equity multiple.
- Passive investors typically see a 1.7x to 2.4x on an equity investment.
- IRR - Internal Rate of Return
- The IRR reflects the time an investor’s money is tied up in an investment. It accounts for how much the investor’s money is growing annually and incorporates all cash distributions including proceeds from the sale or refinance. The more time periods the investment compromises, the lower the IRR.
- This metric represents the “time value of money.” Investors are aware that a dollar today is worth more than a dollar in 5 years so having an understanding of the IRR and when they’ll be receiving back their initial amount is key to choosing an investment.
- Investors will typically see IRR’s ranging from 13% - 20%.
The syndicator will put together an investment package covering these metrics before the passive investor chooses to participate. Understanding how these three metrics work will put together a full story