In commercial multifamily real estate, there’s a language that is spoken when you are connecting with brokers, property managers and other investors in the profession. To avoid sounding like a novice, an investor must be fluent with the real estate terminology to be taken seriously. Let’s take a minute to breakdown one of those terms.
What metric is more important to you to measure your return on your investment? Depends on the deal you are analyzing.
- Cash on Cash is a short-term measurement.
- Calculated by dividing the cash flow by the initial investment.
- CoC return is the relationship between the cash flow and the initial equity investment.
- Two types of CoC returns in apartment investment.
- Cash on cash return including profits from sale.
- Cash on cash return excluding profits from sale. This will show passive investors how much money they should expect to receive with each distribution during the hold period as well as the average annual return of their investment.
- A good CoC return metric is based on the goals of the syndicator and the passive investors.
- IRR is a return of the investment over time. The sooner you receive the cash, the higher your IRR will be.
- Looking for opportunities with 13% IRR or more.
- IRR is an important metric to look at in commercial multifamily as it’s a long-term play.
- Quick calculation: investment amount + cash flow + equity divided by number of years the capital was in the investment. *
By learning these concepts and terms, you’re separating yourself from the novice investor looking to be more active than passive. Here’s where you can learn more multifamily investing terms.
*Just a quick way to summarize the IRR but to fully understand the internal rate of return and its complexity please go to Investopedia for more information.