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In the previous article, you learned what the internal rate of return and the average annual return was. To review, click here.
Today, we explore two other crucial investment metrics you will see when being presented an investment opportunity.
1) Cash on Cash (CoC) Return
2) Equity Multiple
Disclaimer: All examples in this article are purely hypothetical. Each deal is different and past performance does not guarantee future results. These examples are strictly to help you understand key terms and metrics so you can make informed investing decisions.
What is Cash on Cash (CoC) Return?
The CoC return is presented as a percentage and measures the annual cash flow generated by the investment relative to the amount of cash you initially invested. It helps you assess the annual return on your invested capital.
Example (I’m going to use round numbers for the sake of simplicity):
Let’s say you invest $100,000 in a syndication deal that projects to offer a CoC return of 8% annually. That means you would project to receive $8,000 per year of cash flow on that investment.
$100,000 x 8% = $8,000
Now that you understand what CoC return is, it will help you understand equity multiple.
What is an Equity Multiple?
The equity multiple is a performance metric used to assess the total return on investment (ROI) in a real estate project. It measures the relationship between the total cash flow and capital gains achieved and the initial equity invested. This metric considers both the income generated during the investment period and any appreciation realized upon exit.
Simply put, it factors in your overall cash flow (distributions) and capital appreciation (profit) upon sale of the multifamily asset compared to the amount you invested. It is displayed as a multiple. A 2x equity multiple means you’ve doubled your investment.
Example:
Using the same numbers from above, let’s say you invest $100,000 as a limited partner and the projected average annual rate of return is 8% (or $8,000 annually) over the course of a 5 year hold period. Total cash flow (distributions) you received over the holding period was $40,000. Then upon sale of the asset you received an additional $60,000 from the profit of the sale. The equity multiple would be 2x.
Formula: (Total net profit + total equity invested) / total equity invested = equity multiple.
Cashflow ($40,000) + profit from sale ($60,000) + return of original equity investment ($100,000) / original equity investment ($100,000) = equity multiple (2x).
As a passive investor in a multifamily syndication, understanding cash-on-cash return and equity multiple is vital for evaluating the profitability of your investment. These metrics allow you to assess the potential return on your cash investment and the overall profitability considering both cash flow and capital appreciation.
However, it's important to remember that these examples are purely hypothetical and based on projected figures. Real estate investments come with risks, and actual returns can vary. It's crucial to conduct thorough due diligence, review the syndication's track record, and evaluate the market when making investment decisions.
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