![]() ![]() That $8,000 will factor into both your equity multiple and internal rate of revenue.Ĭash-on-cash returns are typically calculated using unreturned equity. If you had an 8% cash-on-cash projection for year one, for instance, that would mean that you’d receive an 8% distribution on your original invested equity of $100,000. Keeping that $100k investment example in mind: Cash-on-Cash Return (ConC)Ĭash-on-cash return is expressed as a percentage as well, and is calculated as shown below:Īnnual pre-tax cash flow / Total cash invested to-date Then it becomes positive and becomes incrementally greater with each additional dollar of positive levered cash flow generated.įor a light value-add deal in a quality market, an upper-teens IRR percentage is typically a solid return.It becomes 0% at the point of all capital being returned (breaking even).It becomes less and less negative as capital is being returned over time.It always starts infinitely negative (before any capital is returned).One of the complexities of IRR is that it assumes that positive cash flows are being reinvested in the transaction and actually earn the IRR-meaning, if the IRR is 10%, positive cash flows to equity would be compounded at 10%.īecause it’s an annualized metric, if the investment spans 12 months, the IRR will be the same as the overall return on that investment. It is an annualized rate of return that’s also expressed as a percentage. The internal rate of return (IRR) is a bit more complex of a metric. Generally, insensitivity to exit cap rates is a quality to look for in any commercial real estate deal. However, in this case, since the returns are fairly insensitive to the exit cap, an investor could be a little more confident in the investment-as long as the sponsor makes a conservative assumption that accounts for the quality of the property and its market. Now, to be frank, predicting an exit cap rate ten years down line is essentially a shot in the dark. Given a projected long-term hold period of ten years, the internal rate of return and multiple won’t be highly sensitive to shifts in the exit cap rate. The exit cap rate, otherwise known as the terminal cap rate, is a key metric to sensitize, as well.Īggressive exit cap rates can greatly impact projected investor returns for both the internal rate of return and the multiple on equity (see definitions for those below). Capitalization Rates (Cap Rates)Ī property’s cap rate is the yield on cost, expressed as a percentage. Key Investment Metrics for Commercial Real Estateįor the sake of example, let’s say that you’re making a $100k investment in a value-add apartment property that has a projected 10-year hold period and is located in a growing neighborhood in Brooklyn. Those metrics can essentially signal whether the return is commensurate with the level of risk the buyer is willing to take on.įor investors, brokers, and other commercial real estate professionals alike, it’s important to be familiar with a few key investment metrics, all of which we’ll cover in detail below. One critical aspect of evaluating a commercial real estate deal (from any point of view), is understanding what the investment return metrics mean for the buyer. ![]()
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