Return Metrics Explained: Everything You Need To Know

Do you dream of retiring early and living life on your terms? Investing in commercial property is one of the most effective strategies for building passive income and accelerating your capital growth. However, if you’re just starting out on your investment journey, it can seem like you’re entering a complex and confusing world. 

Here at Equis Capital, our mission is to help empower investors and support them on their journey to financial freedom. We understand how puzzling it can be when exploring commercial real estate investment, so in this latest blog, we thought we would explore some of the most common return metrics and their meanings. 

CoC: Cash-on-Cash Return 

In its simplest terms, cash-on-cash return describes the annual return an investor makes on the property over a period of time compared to the amount they invested. It can also sometimes be referred to as the cash yield on your property. 

For investors, this metric is a great way to clearly measure the ability of a property to generate cash, allowing them to understand its efficiency and profitability. It also serves as a straightforward method for comparing different properties when assessing which will be the best investment. 

AAR: Average Annual Return 

The average annual return metric is a percentage figure used to showcase a property’s average return over a given period, such as three, five, or ten years. This annualized percentage is designed to summarize the investment’s overall performance, including any income generated during the holding period or gains from capital events. 

It provides useful, easy-to-digest insight for investors, allowing them to make informed decisions about their portfolio management.

IRR: Internal Rate of Return 

An IRR, or internal rate of return, is a metric used to help individuals understand the performance of multiple investments with different timings and cash outlays. It is the rate at which the discounted sum of all cash flows is equal to the initial investment, helping to indicate the return that investors can expect to receive.

One property of IRR is that the sooner capital is returned, the higher the metric is. The higher the IRR is, the more appealing an investment usually is; however, it can be a complex metric to establish.

EMx: Equity Multiple 

Finally, another term that you might hear used regularly is equity multiple. This is a metric that is used to assess the profitability and efficiency of an investment by measuring how many times the initial equity has been returned over the investment period. 

For investors, this straightforward measure allows them to understand the relative profitability of different commercial properties, ensuring they can make an informed decision.   

Which one should I use?

All of these metrics can provide unique insight into your investment opportunities, and the choice will depend on your specific goals and preferences. CoC offers a quick assessment of cash income relative to initial investment, while AAR provides a more holistic view of annualized returns. On the other hand, IRR delivers a sophisticated analysis of investment profitability that considers the timing and magnitude of cash flows.

However, for us, EMx stands out for being a simple and straightforward metric that provides a clear measure of return relative to your initial equity. While it does require a predetermined evaluation timeframe, with five years often being the standard choice for the industry, it is a fantastic opportunity to understand the profitability of your potential investments.

Ready to learn more about commercial property investment?

If you are looking to achieve financial independence through commercial real estate investment but are not sure where to start, then our Equis Capital team is here to help you. We utilize our expertise to protect and multiply our investors’ capital, so get in touch today to learn more! 

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