Passive Real Estate Returns Explained

With every investment opportunity, there are numerous ways to measure the returns. In this article, we’ll explore each of these metrics and how they can help guide your investment decisions.

Internal Rate Return (IRR)

IRR, or internal rate return, is a calculated estimate of projected profit over a period of time. It is a simple, straightforward way you can assess the expected returns generated from each dollar you put into an investment. This metric takes time and the present and future value of the investment into consideration and is based on the premise that a dollar today is worth more than a dollar tomorrow. 

A fundamental part of IRR is understanding the concept of ‘discounting’, compounding interest that works backward in time. To calculate the future value of an investment, the following formula can be used:

Future value = Present value (1 + interest rate) # of compounding periods 

Cash on Cash

This metric measures the incoming cash flow relative to the amount of cash initially invested. Similar to IRR, it can help investors assess current and future profitability. This metric is used to see how each investment affects your portfolio as a whole.

Cash On Cash Return = (Annual Cash Flow / Initial Cash Outlay ) x 100% 

For example, let’s say your annual cash flow (income minus expenses) is $5,000 and your initial investment was $80,000. Your cash on cash return would be ($5,000/$80,000) x 100% = 6.25%. With this calculation, you can see that in one year, you will have earned back 6.25% of your initial cash investment.

Equity Multiplier

The equity multiplier is a return metric that calculates the total cash return of an investment by dividing the cash distributions by the equity invested.

Equity Multiple = Total Cash Distributions / Total Equity Invested

For example, if $500,000 was put towards an investment and the total cash distributions received were $2,000,000, then $2,000,000 / $500,000 = 4. Meaning, this investment has an equity multiple of 4. Or, for every $1.00 invested, you are earning back $4.00.

Connect Real Estate Capital

Investing isn’t just for the experts. No matter your background or experience, you have the opportunity to make your money work for you through passive investing. That’s why at Connect Real Estate Capital, you’ll reap the benefits of a passive cash flow while our experienced team handles the day-to-day operations. 

Whether you are a seasoned real estate investor or are looking to get started, we’d be happy to discuss investment opportunities. Click here to connect with one of our team members.