Multifamily Return Metrics Explained for Investors
Nichole Haygood
Helping Busy Professionals with Passive Income through Multifamily Real Estate Investments
In the world of multifamily real estate investing, terminology can be confusing, even for an experienced investor. As an investor, it is important to understand the return metrics of a potential investment so that you can make an informed decision. Here are the four return metrics for investing in multifamily real estate.
Cash on Cash Return (CoC):
This metric evaluates the annual cash flow generated by the property in relation to the initial cash investment. By dividing the property’s annual cash flow by the total cash invested, investors can assess the percentage return on their investment.
Internal Rate of Return (IRR):
More nuanced than other metrics, the Internal Rate of Return (IRR) takes into account the time value of money (a dollar is worth more today than tomorrow), offering a comprehensive picture of an investment’s profitability. IRR represents the discount rate at which the net present value (NPV) of future cash flows equals zero.
Average Annualized Return (AAR):
The average annualized return (AAR) refers to the average rate of return on an investment property over a specific period, typically expressed on an annual basis. This metric takes into account various factors, including rental income, appreciation in property value, and any other sources of return or expenses associated with the investment.
Equity Multiple (EMx):
The equity multiple (EMx) provides a measure of the total returns an investor can expect to receive relative to their initial equity investment in a property. The equity multiple takes into account both income generated during the holding period and any profit realized upon the property's sale.
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Nichole Haygood [email protected]