Apartment Syndications: Understanding the Metric Terms to Sweet Returns!

Multifamily Real Estate Investing, Syndication, apartment investing, Return Metrics, Passive Income

With a background in engineering this is probably going to be my favorite topic! We get to talk numbers and formulas, I will keep it simple and fun! I hope you're as excited as I am, especially because these are the terms that will determine how bulky your wallet or purse will get with the passive income you will be generating!

We'll cover common return metrics in apartment syndications also known as multifamily syndications, the factors that affect these metrics, and how to evaluate return metrics in the context of your investment goals and risk tolerance. If you don't know what multifamily syndications are, read our article that covers this to learn more!

Don't worry about the formulas, simple understand what the metric is telling you. Leave the calculations and number crunching to me!

Common return Metrics in Multifamily Real Estate Syndications

Cash-on-cash (CoC) Return

The Cash-on-Cash (CoC) return, expressed as a percentage, is one of the most commonly used return metrics in real estate investing. It measures the annual return, on your investment compared to the amount of cash you initially invested.

Formula: CoC = Annual Cash Flow / Total Cash Invested

Example: Let's say you invest $100,000 in a multifamily real estate syndication, and the property generates $10,000 in pre-tax cash flow annually. The CoC return would be 10% ($10,000 / $100,000).

Simply put, this compares the amount of cash generated by the property to the amount of cash invested, this helps investors determine the annual return on their initial cash investment.

Internal Rate of Return (IRR)

The Internal Rate of Return (IRR), expressed as a percentage, measures the total return on your investment over the holding period, taking into account the time value of money. It's a more complex metric to calculate, but it provides a more comprehensive view of your investment returns. Why is this important? $100,000 you has much more value than 5 or 7 years from now. So the sooner you receive your cash the higher the IRR will be.

Formula: NPV or IRR = ∑ [CFt / (1+r)t] - C0 = 0

Example: Let's say you invest $100,000 in a multifamily real estate syndication, and the property generates $10,000 in cash flow annually for five years. At the end of the holding period, the property is sold for $150,000. The IRR would be 15%.

Equity Multiple (EM)

The Equity Multiple (EM) measures the total return on your investment compared to the total amount of equity invested. It takes into account the return of both the initial investment and the profits generated from the sale of the property. In other words, this tells you how many times you multiplied your money at the end of the investment period.

Formula: EM = Total Cash Distributions / Total Equity Invested

Example: Let's say you invest $100,000 in a multifamily real estate syndication, and after five years, the property is sold and in total through out the holding period and sales proceeds, you receive $250,000 in total cash distributions. The EM would be 2.5x ($250,000/$100,000).

Net Operating Income (NOI)

The Net Operating Income (NOI) measures the income generated from a property after all expenses are deducted, except for debt service. It's an important metric for evaluating the property's profitability.

Formula: NOI = Total Revenue - Total Operating Expenses

Example: Let's say a multifamily property generates $2,000,000 in annual revenue and has $1,000,000 in annual operating expenses. The NOI would be $1,000,000.

Annualized Rate of Return (ARR)

The Annualized Rate of Return (ARR) measures the total return on your investment on an annual basis. It takes into account the holding period and any cash flows generated during that period. Unlike IRR, the ARR does not take into consideration the time value of money. It simply averages the annual return by the number of years of the investment.

Formula: ARR = [(1 + Equity Multiple) ^ (1 / Holding Period)] - 1

Example: Let's say you invest $100,000 in a multifamily real estate syndication, and after five years, the property is sold and you earn $150,000 from the sales proceeds, and you received $100,000 in total cash distributions during the holding period. The ARR would be 36.8% [(1 +2.5 ) ^ (1 / 5) - 1].

Factors that Affect Return Metrics

Several factors can affect return metrics in multifamily real estate syndications, here are some key factors and questions to consider:

Property location and condition: Can the residents afford market value rents? How much expense money will the condition of the property require?
Investment strategy and business plan: Is this a heavy value add, opportunistic or core investment?
Debt structure and interest rates: What are the payment terms and interest on the loan?
Market conditions and trends: Is there a demand in the area to keep a certain percentage of units occupied? Are people and jobs moving into or leaving the area?

Understanding these factors and how they affect return metrics can help you evaluate the potential risks and returns of a real estate investment opportunity.

How do the Metrics relate to your Investment Goals?

It's important know consider them in the context of your investment goals and risk tolerance. For example, if you're looking for a steady income stream, a higher CoC return may be more attractive than a higher IRR. On the other hand, if you're willing to take on more risk for the potential of higher returns, a higher IRR may be more appealing.

Here are some tips for evaluating return metrics:

Consider the holding period of the property and investment: Different return metrics may be more relevant for short-term versus long-term investments. For example, the CoC return may be more relevant for a short-term investment, while the IRR may be more relevant for a long-term investment.
Look at the big picture: While return metrics are important, they should not be the only factor in your investment decision. Consider the investment strategy, the property's location and condition, and the market conditions and trends.
Compare with other investment opportunities: Evaluate the return metrics of a real estate investment opportunity against other investment opportunities with similar risk profiles. This can help you determine if the investment opportunity aligns with your investment goals and risk tolerance.
Consult with a professional: Consider consulting with a real estate professional or financial advisor to help you evaluate the potential risks and returns of a real estate investment opportunity.

Conclusion

Return metrics are an essential component of evaluating a multifamily real estate investment opportunity. By understanding these metrics and the factors that affect them, you can make an informed decision that aligns with your investment goals. Remember to evaluate return metrics in the context of the investment strategy, the property's location and condition, and the market conditions and trends.

If you are looking to get started investing or have more questions, don't hesitate to reach out to us at RA Multifamily Investments! We specialize in providing passive investors with access to lucrative multifamily investment opportunities. Whether you're a seasoned investor or just getting started, we are dedicated to helping you achieve your financial goals through strategic investment opportunities.