22 Aug Metrics to Consider When Investing in Commercial Real Estate
What metrics are important in commercial real estate investing and what is important when considering a Return on Investment? Maybe a better question is how much money you can expect to yield on that investment if the following metrics were presented to you for an investment opportunity. Which one attracts your attention?
- IRR of 36%
- Multiple of 2.1X
Which one would matter to you and why?
How IRR and Multiples Are Defined
First, we must understand the definition of an IRR and a Multiple in layman’s terms. An IRR or Internal Rate of Return is basically how fast the investment repays your initial investment and returns. A multiple is how much the investment repays on your initial investment and returns.
As an example, if you hear that you could expect a 36% IRR on your investment of $100,000, what does that mean? Did the investment use your money for one month, six months, or one year and return a high IRR?
In theory, an investment could use your money for 180 days and your return on your investment could have a high IRR with a minimal cash return to you. A $100,000 investment with an IRR of 36% would be a gain of $16,470 over a six-month period. Is receiving a high IRR with a small cash return worth the time associated with the investment? Did you really increase your wealth? Some may say yes but most would not get too excited after considering all the variables.
Multiples Show You Actual Cash Return
We encourage investors to focus on the Multiple. The Multiple reflects the amount of money an investor receives during the duration of the investment. How much spendable cash could you earn? With the same $100,000 investment and a multiple of 2.1X, you could expect to get back a total of $210,000: $100,000 of your principal investment and a profit of $110,000 which can be paid through and up to the sale of the asset. For most, this is how you create wealth.
While it’s possible to manipulate IRRs or make them look deceptively attractive, you cannot manipulate multiples. Multiples are the actual cash return on your investment and you should heavily consider them as you decide what will help you build wealth.
Here at Presario, we look for well-positioned assets that can create value for our investors. If you would like more information about our current projects, please email [email protected] or learn more about our company by signing up for our monthly newsletter and following us on Facebook, Twitter, or LinkedIn.