Am I doing this right?
So I am getting started and am trying to do my due diligence. I’m planning on trying to find a small equity deal (I believe it’s more conservative than a debt deal) to go into at approx 10k. I may do 25k but only if the sponsor has a great track record.
I have read the definitions and think I know but please humor me. Let’s say distributions are quarterly.
If the IRR is 15%, does that mean I should expect a quarterly distribution of 15%of my money?
If Equity multiple is 2.5x, I should expect 2.5x’s my money at close
Targeted average cash yield is 5%, I'm lost here. I do not know the difference between IRR and this.
Other than really looking at sponsor history, what other things should I look at? I appreciate the time and have a wonderful evening!
Hi Chris!
15% IRR: No, it does not mean that. Ask the sponsor for a projected schedule of cash flow distributions. It's not a commitment on their part, but it should help you understand what their plan is. IRR is a complicated calculation.
In most situations, you'll have little to no cash flow distributions initially, then they'll start after a few quarters.
Here's a really good article for you on RealtyShares.
Sponsor history is great, many people do background checks and reference checks on them as well. Understand the business plan and what you should expect.
How many sponsors have you vetted and how many deals have you looked at? Vetting more and looking at more deals is always a good idea if you're interested in passively investing.
Ask the sponsor to show you the numbers in detail. That shouldn't be a problem. If they're just telling you 15% IRR and expecting you to not ask any more questions... that's not a good sign.