Comparing Return Metrics as a Limited Partner

Investing in real estate syndications can be an attractive option for those looking to diversify their portfolios and generate passive income. When evaluating potential real estate investments, it’s important to understand the different return metrics used to measure performance. In this article, we’ll take a look at four of the most common return metrics: Internal Rate of Return (IRR), Cash on Cash Return (CoC), Average Annual Return (AAR), and Equity Multiple (EM).

Internal Rate of Return (IRR) measures the annualized rate of return for an investment over a specific period of time. It is expressed as a percentage, and is often used to compare different investments over the same period of time. IRR is the most commonly used metric for evaluating the performance of real estate syndications.

Cash on Cash Return (CoC) is a measure of the cash flow generated by an investment relative to the amount of cash invested. It is calculated by dividing the annual cash flow by the total amount of cash invested. CoC is a useful metric for evaluating the potential ROI of an investment, as it takes into account both the cash flow generated and the amount of capital invested.

Average Annual Return (AAR) is a measure of the average return generated over a period of time. It is calculated by taking the total return over a period of time and dividing it by the number of years in the period. AAR is a useful metric it provides investors with a measure of the average performance of an investment over time and can be used to compare the performance of different investments.

The Equity Multiple (EM) is a measure of the multiple of equity invested by an investor in a real estate syndication. It is calculated by taking the current value of the investment and subtracting the initial investment, then dividing the result by the initial investment. The result is then expressed as a multiple of the initial investment. This metric is useful for investors who want to compare the performance of their investments over different time periods.

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