There are many factors to consider when investing in multifamily, including internal rate of return, tax considerations, illiquidity period, and more. However,
There are a couple metrics that are critical to quickly understand returns:
1. Cash on Cash Return
2. Equity Multiple
I’ll explain both, but the quick answer is that we aim to deliver 6 to 8% projected cash on cash return and 1.8x to 2.0x projected equity multiple over a period of 2 to 5 years. *
What is cash on cash return?
At a high level, cash on cash return measures the return on the cash invested in the property. The formula is:
Cash on Cash Return %= (Income – Expenses) / Total Investment Amount
This calculation becomes easy when we look at this from a multifamily investment perspective. Once a syndication project is ready to start distributions, the syndicators will analyze the property’s income & expenses to determine how much to distribute to investors. Cash distributions are made on a regular basis, such as monthly or quarterly.
Multifamily Cash on Cash Return % = Total Annual Cash Distributions / Total Investment Amount
For example, if you invest $100k in a property with a projected 8% cash on cash distribution, you should expect to receive $8,000 of distributions through the year. If the distributions are paid out quarterly, then you would anticipate receiving around $2,000 per quarter. Often in the first year of the investment, much of the up-front income is recirculated into the apartment to renovate the units quickly (and thereby increase rents), so distributions typically start 6 months after the property closing date. Once distributions kick in, the syndicator will then catch up with the distributions, so potentially the first two distributions could be twice as much as usual. In our example, an investor could then potentially get $4,000 in Q3 and Q4 of the hold period.
The distributions on a $100k investment could look like this over two years given an 8% cash on cash return:
Y1-Q1: $0
Y1-Q2: $0
Y1-Q3: $4,000
Y1-Q4: $4,000
Y2-Q1: $2,000
Y2-Q2; $2,000
Y2-Q3: $2,000
Y2-Q4: $2,000
What is an Equity Multiple?
An equity multiple is the amount of return that is projected over the lifetime of the investment. Most syndicators will tell investors to expect a hold period of 2-5 years. The equity multiple would then be the total expected return to the investor upon the sale of the property at year 2-5, relative to the investor’s initial investment amount.
In basic terms, if your syndicator’s estimate is a 2x equity multiple, you should expect to receive a total return of two times the amount of invested money within the property’s hold time. To be clear, cash distributions throughout the hold time are also included in this “total return”, in addition to the lump sum profit received at sale.
Equity Multiple = (Distributions + profit at sale) / Total Amount Invested
In our example above, over a two-year period, the investor received $16,000 in cash distributions. If the syndicator decided to sell exactly at the two-year mark, the investor should expect to receive $184k as a final distribution resulting in $200k for the total investment.
Ready to learn more? Have more questions?
There is a lot to consider when investing in multifamily properties, and I’d be happy to discuss these topics further with you. Feel free to schedule a call with me or fill out the information in “Join Now” to receive the latest information on new opportunities.
*Disclaimer: These are projections based on assumptions and expectations made in light of currently available information, historical performance, industry trends, market conditions. An actual property’s performance may differ from these projections based on many factors. Moreover, past performance is no guarantee of future results; therefore, no guarantee is presented or implied as to the accuracy of specific forecasts, projections, or predictive statements contained herein.
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