Equity Multiple (EM):
The equity multiple is defined as the total cash distributions received from an investment, divided by the total equity invested. Essentially, it’s how much money an investor could make on their initial investment. An equity multiple less than 1.0x means you are getting back less cash than you invested. An equity multiple greater than 1.0x means you are getting back more cash than you invested.
For instance, an equity multiple of 2.50x means that for every $1 invested into a CRE project, an investor could be expected to get back $2.50.
Cash on Cash (CoC):
Cash-on-cash return calculates the cash income earned on the cash invested in a property. It’s sometimes also referred to as the cash yield. Cash-on-cash measures the return on the actual cash invested, whereas standard ROI take into account the total return on investment.
Capitalization Rate:
The capitalization, or cap rate is used in commercial real estate to indicate the rate of return that is expected to be generated on a real estate investment property. The calculation is based on the Net Operating Income the property generates divided by the Purchase Price.
Preferred Return (Pref):
As the name suggests, preferred return is a profit distribution preference whereby profits, either from operations, sale, or refinance, are distributed to one class of equity before another until a certain rate of return on the initial investment is reached. The pref is stated as a percentage, such as an 7% cumulative return on initial investment; however, it can also be stated as a certain equity multiple.
Internal Rate of Return (IRR):
The Internal Rate of Return (IRR) is the rate at which each invested dollar is projected to grow for each period it is invested. The IRR is one of the best ways for an investor to compare various investments based on their yield while holding other variables constant.
It differs from other metrics in that it accounts for the concept of the “time value of money”, or the fact that a dollar received and reinvested elsewhere today is worth more than a dollar expected to be received and reinvested next year.
