There are several common return metrics used for Investment in Commercial Real Estate.

There’s an Equity Multiple that is expressed in terms of a ratio, which indicates how much you’ll be left with in comparison to what you began with. Thus, an equity multiplier in the range of “2.5x” would mean you receive $2.50 out of $1.00 into. Simple and easy to comprehend, but it doesn’t reveal how long it takes to receive the return. I’m sure you’d prefer to get $2.50 today instead of in 10 years. Inflation is likely to occur within this period, and then the $2.50 will be worth less.

One of the more well-known returns metrics include IRR as well as Cash On Cash. In contrast to Equity Multiple, there’s a time component in these metrics, and therefore they are calculated as percentages, which are you’ll earn a percentage each year. However, IRR or Cash on Cash Return tell an investor two distinct aspects about their returns. Let’s get into it.

IRR

IRR is an acronym in the form of Internal Rate of Return. It is a financial metric. It is used to measure an investment’s overall return on investment by weighting cash that is returned earlier over cash received later, in accordance with the value of the money. Furthermore, it is an institutional-style return measurement that assists major funds to account for gains. The fact that you have a large IRR doesn’t necessarily mean that you’re receiving any cash flow at present. It takes the sale or exit of an asset as well as the cash flows you get during the lifetime that the asset.

Cash on Cash Return

Cash on Cash informs you of the present return of an investment. It is calculated by taking the amount of cash that was returned to the asset in the previous year, and then dividing it by the cash expenditure needed to earn the return. The Cash on Cash Reward could fluctuate each year depending on the overall performance of an asset, but real estate professionals typically discuss cash on return as a singular measure when an asset has stabilized (when it is stable in the flow of cash). If an investor buys the property for $1 million (no debt in this instance) and then during the three-year period of its ownership, the Net Cash Flow was $200,000, we’d conclude that this is a 10 percent Cash on Cash Return ($100k multiplied by 1 million). If you’re in the 2nd or fourth year cash on return could be different, it’s a metric that’s specific to the year in question.

Which one to use

Which of these measures should you use in deciding on the best commercial real estate investment? Both. A smart investor takes into account both return metrics and then weighs the results against their own preference for return, which may be distinct for different investors in diverse financial needs. An older person who wants to make a living from the money from a property could be focused on the Cash on Cash Return potential of investment, while a new business owner may be aware that their game is more complex and more oriented towards IRR.

The more patient you are with your capital and the better, you must think about IRR as the most crucial measure. Every investor must consider the end goal when planning the Real Estate Investment Strategy and setting their goals of return metric.