Key Takeaways
- IRR rewards speed, equity multiple measures total profit, and cash-on-cash tells you what you're earning right now. No single metric captures the whole picture
- A deal with a 25% IRR and a 1.5x equity multiple made less money than a deal with a 16% IRR and a 2.1x multiple. The first was just faster
- Ask a sponsor how they calculate projected returns. The assumptions buried in the model — rent growth, exit cap rate, refinance rate — matter more than the headline number
Real estate investment presentations invariably lead with return numbers. "18% projected IRR." "2.0x equity multiple." "8% preferred return." These metrics are real, they are measurable, and they are important. But they are also easy to manipulate, selectively present, and misunderstand.
If you're evaluating a deal — or evaluating a sponsor — understanding what each return metric actually measures, what it leaves out, and how it can be gamed is essential. Here's what each one means in practice.
Cash-on-Cash Return: What You're Earning Right Now
Cash-on-cash is the simplest metric. It measures the annual cash flow distributed to you as a percentage of the capital you invested. If you invest $100,000 and receive $8,000 in distributions during the year, your cash-on-cash return is 8 percent.
The appeal of cash-on-cash is its transparency. It tells you what the property is actually producing in terms of distributable cash, right now, relative to your investment. It doesn't include projections, future refinances, or eventual sale proceeds. It's today's income divided by today's investment.
The limitation is significant: cash-on-cash says nothing about appreciation, equity build-up through principal paydown, or the total return on the investment. A deal can produce a 6 percent cash-on-cash return and still be an excellent investment if the property is appreciating at 10 percent per year and the investor will realize a 2x equity multiple at sale. Conversely, a deal with a high cash-on-cash but a declining asset value is returning your capital to you slowly, not generating real wealth.
Where cash-on-cash matters most: for investors who need current income. If your investment goal is replacing a salary or supplementing retirement income, the cash-on-cash number is essential. If you're investing for total return and don't need the quarterly distribution check, cash-on-cash matters less than the total picture.
IRR: The Time-Weighted Return
Internal rate of return is the metric the industry uses most — and the one most frequently misunderstood. IRR measures the annualized rate of return, adjusted for the timing of every cash flow. It accounts for when you invest, when you receive distributions, and when you get your capital back. The math is complex (it's the discount rate that makes the net present value of all cash flows equal zero), but the concept is straightforward: IRR tells you what rate of return your money earned, adjusted for how long it was at work.
The time sensitivity is what makes IRR powerful — and what makes it misleading. Because IRR rewards speed of return, a deal that returns all capital in 18 months can show a higher IRR than a deal that holds for five years and ultimately makes more money in absolute terms.
IRR is a rate. Equity multiple is an amount. You can't deposit an IRR. At the end of the investment, the check you receive reflects the equity multiple, not the IRR.
Consider two deals. Deal A: you invest $100,000, receive nothing for 18 months, then get a check for $140,000 when the property sells. Your IRR is approximately 25 percent, and your equity multiple is 1.4x. Deal B: you invest $100,000, receive $8,000 per year for five years in distributions, then get $152,000 at sale. Your total cash collected is $192,000. Your equity multiple is 1.92x. Your IRR is approximately 16 percent.
Deal A has the higher IRR. Deal B put $52,000 more in your pocket. Which was the better investment depends entirely on what you did with the money after Deal A returned your capital. If you immediately reinvested at the same rate, Deal A's speed gave you a compound advantage. If you sat in cash for two years waiting for the next deal, you would have been better off in Deal B from the start.
The other problem with IRR as a projected metric: it is extremely sensitive to the assumptions baked into the model. A slightly higher assumed exit cap rate drops the IRR significantly. A six-month delay in stabilization changes it. Projecting a favorable refinance in year three versus year four changes it. Sponsors know this, and the most aggressive operators build their models with assumptions that flatter the IRR — fast lease-up, aggressive rent growth, optimistic exit timing — because that's the number that sells.
Equity Multiple: How Much You Actually Made
The equity multiple measures total return in the simplest terms possible: total cash received divided by total cash invested. If you invest $100,000 and receive $180,000 back over the life of the deal (distributions plus return of capital at sale), your equity multiple is 1.8x. You got back 1.8 times what you put in.
Unlike IRR, the equity multiple doesn't care about timing. It doesn't distinguish between a 1.8x return achieved over three years and a 1.8x return achieved over seven years. That's its limitation — it ignores the time value of money. But it's also its strength: it tells you, in plain terms, how much total profit the investment generated.
For value-add deals with a 3- to 5-year hold, a solid equity multiple target is 1.5x to 2.0x. That means 50 to 100 percent total profit on invested capital. Below 1.5x on a deal with meaningful risk — renovation execution, lease-up uncertainty, market timing — and you're probably not being compensated adequately for what you're taking on. Above 2.0x and the deal either had exceptional execution, favorable tailwinds, or a higher risk profile that happened to work out.
We present both IRR and equity multiple because neither tells the full story alone. A high IRR with a low multiple means the deal was fast but didn't generate much absolute profit. A high multiple with a low IRR means the deal was profitable but your capital was tied up for a long time. The best deals do well on both dimensions — but when there's a tradeoff, the equity multiple tells you how much money you made, which is ultimately what matters.
Preferred Return: How the Split Works
The preferred return — commonly called the "pref" — isn't a guarantee of return. It's a priority in the distribution sequence. In a typical syndication structure, the limited partners receive a preferred return before the general partner participates in any profit split. The common range is 7 to 9 percent annually.
Here's what that means in practice. Say the deal in its first year generates $80,000 in distributable cash flow. The total LP equity investment is $1 million. At an 8 percent preferred return, the first $80,000 gets distributed entirely to the LPs. The sponsor gets zero from that cash flow. If the deal generates more than $80,000, the excess is typically split between the LPs and GP according to the promote structure — perhaps 70/30 or 80/20 depending on the deal terms.
The preferred return is usually cumulative, meaning if the deal produces less than the 8 percent pref in one year, the shortfall carries forward. The sponsor can't participate in any profit split until the cumulative preferred return is fully caught up. This is important. In a deal with an 18-month renovation period where cash flow is minimal, the pref accrues. The LP is owed — not just the current year's pref, but the accumulated shortfall from the renovation period — before the sponsor sees any promote.
Two things to watch: first, whether the pref is cumulative or non-cumulative. Non-cumulative prefs reset each period and don't carry forward shortfalls. They're less favorable for the LP. Second, whether the pref is based on invested capital or committed capital. Invested capital changes as the deal returns money (through refinance, for example). If the deal returns 60 percent of investor capital through a refinance, the pref calculation should be based on the remaining 40 percent, not the original amount.
What Good Sponsors Tell You
The return metrics themselves are numbers. What separates a transparent sponsor from a promotional one is how they present those numbers and what assumptions they disclose.
A sponsor who shows you a projected 20% IRR and a 2.2x equity multiple has told you something. A sponsor who shows you the same projections and then walks you through the assumptions — what rent growth they're modeling, what exit cap they're using, when they expect to refinance and at what rate, what vacancy factor they're carrying — has told you something far more useful. Because now you can evaluate whether those assumptions are reasonable.
Conservative sponsors show investors base-case projections using current market rents, current interest rates, and a conservative exit cap rate. We don't model aggressive rent growth or a favorable rate environment. If those things happen, the returns will be better than what we projected. But we'd better to under-promise on the model and over-deliver on execution. The reverse — inflated projections that require everything to go right — is how investors get disappointed even when the deal performs reasonably well.
When you're comparing deals across sponsors, normalize the assumptions before comparing the returns. A projected 22% IRR built on 5% annual rent growth and a 25-basis-point cap rate compression is not the same as a projected 16% IRR built on 2% rent growth and no cap rate movement. The second deal might actually outperform the first in the real world. But you'd never know that from the headline numbers.