Making sense of real estate returns: IRR, CoC, and equity multiple
Every offering memorandum leans on three numbers: internal rate of return, cash-on-cash, and equity multiple. They get quoted as if they're interchangeable. They aren't. Each answers a different question, and a deal can look great on one while quietly failing another. If you understand all three, no projection can surprise you.
Cash-on-cash: am I getting paid while I wait?
Cash-on-cash (CoC) is the simplest. It's the annual cash distribution divided by the cash you put in. Invest $100,000, receive $7,000 in a year, that's a 7% cash-on-cash return. It ignores appreciation entirely and tells you one thing: how much income the asset throws off while you hold it. For investors who want passive income now, this is the number that matters most.
Equity multiple: how many times do I get my money back?
The equity multiple is total dollars out divided by total dollars in, across the whole life of the deal. A 2.0× multiple means every dollar came back as two. It's wonderfully honest because it can't be inflated by time, but that's also its blind spot. A 2.0× over three years is spectacular. A 2.0× over fifteen years is mediocre. The multiple tells you how much, never how fast.
IRR cares about speed. The equity multiple cares about size. You need both to know whether a deal is actually good.
IRR: the one everyone quotes and few explain
Internal rate of return folds in timing: it's the annualized return that accounts for exactly when each dollar moves. Because it's time-weighted, a quick flip can post a huge IRR on a small profit, and a long, steady hold can post a modest IRR on a large one. This is why IRR is the number sponsors love to lead with: it's the easiest to make look impressive by simply assuming an earlier sale.
Here's the trap. A deal projecting a 30% IRR over eighteen months might return your capital plus 40%. A deal projecting a 16% IRR over five years might return your capital plus 110%. The second one made you far more money, but the first one has the bigger headline.
Reading them together
Use them as a set. CoC tells you what you'll feel in your bank account each quarter. The equity multiple tells you the total prize. IRR tells you how sensitive that prize is to the assumed timing of the sale. When you see a high IRR, your next question should always be: what sale date and what exit cap rate is that built on? If the answer depends on selling fast into a hot market, the IRR is borrowing optimism from the future.
No single number is the truth. Cash-on-cash is your income, the equity multiple is your total return, and IRR is the speedometer. A trustworthy projection looks reasonable on all three at once, and tells you the assumptions underneath.
