IRR, Equity Multiple and Cash-on-Cash: Three Numbers, Three Questions
A projection quoting a single return figure has chosen which question to answer. Knowing which one, and which it declined to answer, is most of what reading a projection consists of.
Three numbers appear on every syndication projection, and they are frequently treated as three views of the same thing. They are not. Each answers a distinct question, and each is silent on the others.
What each one measures¶
| Measure | The question it answers | What it ignores |
|---|---|---|
| Internal rate of return | What annualized rate makes these cash flows worth their cost? | Absolute size. A high rate on a small, fast gain looks the same as one on a large one |
| Equity multiple | How many dollars came back for each dollar in? | Time entirely. 2.0x over three years and over eleven are the same number |
| Cash-on-cash | How much cash did I receive this year against what I put in? | Return of principal, the sale, and every other year |
| Average annual return | Nothing useful | The time value of money, which is what a return measure is for |
Why they disagree¶
The specific distortions to watch for¶
A short hold flatters the internal rate of return. Deal A above returns the least money and has the best rate. This is not an error in the measure — getting money back sooner genuinely is worth more — but a projection leading with a rate of return on a two-year hold is presenting the metric most favorable to it.
An early refinance distribution moves the rate a lot and the multiple not at all. Returning capital in year two through a refinance raises the internal rate of return substantially while adding nothing to total dollars. Where the sponsor's hurdle is measured on the rate, that refinance is worth real money to the sponsor and nothing to the investor's total.
Cash-on-cash in year one is often the lowest year. In a value-add business plan, distributions start low and rise. Quoting the projected stabilized figure as though it were the current one is common, and the difference is visible in the year-by-year table if the model provides one.
Average annual return is not a return. Dividing total profit by the number of years produces a number that is always higher than the internal rate of return for any deal where the money comes back at the end. It has no financial meaning. Its appearance is a signal about the document rather than the deal.
Building the comparison yourself¶
Where a projection gives a year-by-year cash flow table, all four measures can be reconstructed in a spreadsheet in a few minutes, which is worth doing for one reason: it forces the assumptions into view.
The exercise is mechanical. Lay out the equity contribution as a negative figure at time zero, each year's projected distribution, and the exit proceeds in the final year. The multiple is the sum of the positives over the contribution. The internal rate of return is one function. Cash-on-cash is each year's distribution over the contribution.
Then change the exit year by one in each direction and watch what happens. The measure that moves most is the one the deal's economics are most sensitive to, and it is usually the one the sponsor's hurdle is measured on.
Reading them together¶
The three measures used together answer the question that none answers alone: how much, how fast, and how much of it along the way.
- The equity multiple sets the size of the outcome. It is the hardest to distort because it is a ratio of two totals.
- The hold period converts it into an annualized sense of the return. Multiple and years together approximate the internal rate of return without the sensitivity to timing games.
- The internal rate of return then shows how much of the result comes from timing rather than from total dollars. A rate far above what the multiple and the hold would imply means capital came back early — worth knowing, and worth checking what the sponsor's hurdle is measured on.
- Cash-on-cash describes the experience of holding the investment, which matters if the distributions are part of why you are investing.
A projection that provides all four, year by year, is giving you enough to form a view. One that provides a single headline figure is giving you a conclusion.
The next question is what assumptions produced any of them, which is the subject of pro forma assumptions and, in particular, the exit capitalization rate that usually determines most of the projected result.
Primary sources
Every factual claim above is traceable to a filing, a rule or an agency publication. These are the ones this article relies on.
Questions readers ask
What is a good IRR for a real estate syndication?
This site will not publish a benchmark number, because no citable source supports one and the invented figures circulating in this industry are exactly the problem. What can be said is that an IRR is only meaningful alongside the hold period, the equity multiple, and the assumptions that produced it.
Why do sponsors quote IRR most often?
Because it is the largest-looking of the three in most projections and because it is the standard hurdle measure. It is also the one most sensitive to assumptions about timing, which makes it the easiest to improve without improving the deal.
What is cash-on-cash return?
Annual cash distributed divided by cash invested. It measures current income in a single year and says nothing about the return of principal, the sale, or the time value of money.
What is average annual return?
Total profit divided by years divided by capital. It is not a real return measure because it ignores when the money arrived, and a deal quoting it alongside a long hold is presenting the most flattering arithmetic available.
Which number should I look at first?
The equity multiple, because it is the hardest to distort, followed by the hold period that produced it. Then the IRR, to see what timing contributed. Cash-on-cash last, because it describes one year.
Read next
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- WaterfallReturn of Capital: Why Tier Order Decides EverythingThe tier that repays your principal can sit first in the waterfall or last. Moving it changes whether the sponsor earns a promote on profit or on your own money.
- WaterfallPreferred Return: Cumulative, Compounding, and Why the Difference Is MoneyFour one-word choices inside a definition decide what "8% preferred" is worth. All four produce the same phrase in the marketing material.