As we’ve discussed in other articles, **when purchasing apartment buildings**, there is normally **two types of partners** involved:

- A general partner or partners (syndicators)
- Limited partners (investors)

**There is a variety of structures on how limited partners can get paid. Some of these are:**

- A fixed preferred return
- A share of the profits from the rents and the sale of the building
- A combination of the two approaches above
- Other creative approaches

Independently of the approach chosen, there are certain metrics that each potential investor should be familiar with. Some of these are discussed in the following sections.

**Internal rate of return**

**Internal rate of return or IRR,** is a financial metric that **estimates the total profitability of investments**. It can help calculate the annual return for an investment in 1 year, 10 years, or even 50 years.

**The higher the estimated IRR, the better**, in terms of cash flow.

**IRR formula**

NPV = Net present value

n = Non-negative integer

N = Total number of periods

C(n) = Cash flow

r = Discount rate

To calculate IRR using this formula, **NPV must be equal to zero** and the goal is to must solve for r. The software program** Excel** makes it easy to find your IRR.

**Net present value**

**Net present value also called NPV, is** **used to analyze the return of an investment**. It is calculated by taking the difference between the current value of cash inflows and current value of cash outflows over a certain period of time. The main idea of NPV is that **a dollar in the future is not as valuable as a dollar today.** This is because money loses it’s value over time because of inflation.

When NPV is **positive**, a project will generally be **profitable** while a **negative** NPV represents a **net loss**.

NPV = Today’s Value of The Expected Cash Flows – Today’s Value of Invested Cash

**Cash on cash (CoC)**

**Cash on cash return, is a rate of return that estimates the profit earned on the money invested in a property**. It measures the annual return that an investor made. Unlike IRR, **cash on cash may not span multiple years**. It usually only measures the profit for one year.

The formula for cash on cash return is as follows:

Cash on cash = Annual Cash Flow / Total Cash Invested

Annual Cash Flow = (Gross Scheduled Rent + Other Income) – (Vacancy + Operating Expenses + Annual Mortgage Payments)

**What is equity multiple?**

**Equity multiple is a real estate metric that helps to calculate the estimated total profits from an investment.** To calculate it, you must divide the total amount of money earned by the total amount of money invested.

Equity Multiple = Total Distributions / Total Invested

**Examples:**

- An investor buys a property for
**$200,000**. This property pays**$10,000**a year in NOI. The investor then sells the property for**$250,000**in 3 years.**$10,000**per year for three years plus**$250,000**is equivalent to**$280,000**. So now, lets calculate the CoC:

**$280,000 / ****$200,000 = ** **1.4** (equity multiple)

- An investor buys a property for
**$300,000**. The investor then sells the property in 10 years for**$600,000**. But the investor only receives**$510,000.**

** $510,000 / $300,000 = 1.7** (equity multiple)

In conclusion, **investments in different asset classes may require different due diligence techniques,** but the formulas that we have laid out in this article will serve you well when analyzing investments across many different asset classes.