INTERNAL RATE OF RETURN (“IRR”)
IRR is a return metric that considers the time value of money and the impact of re-invested distributions. It is also referred to as “economic rate of return” or “discounted cash flow rate of return.” Calculating IRR by hand is cumbersome as it can only be found by trial and error. Use Excel to calculate IRR quickly by using formulas “=IRR()” or “=XIRR()” with a series of cash flows.
YIELD (A.K.A. CASH ON CASH RETURN)
Calculate yield, or cash on cash return, by dividing a property’s annual cash distributions by equity contribution. Investors who value passive income will evaluate investment opportunities based on their projected yield. Yield can differ greatly from year to year, so many sponsors will present an anticipated average yield. Note: Yield is very sensitive to the amount of debt on an investment. Real estate with a high loan to value will have high variability in its yield.
Equity Multiple is a proxy for total return that compares cash distributions to the total invested equity. Real estate professionals use this metric to compare the total return of an investment to alternatives. Note: Equity multiple does not consider the time value of money. Two investment opportunities with equal equity multiples can have very different internal rates of return.