Syndication Returns Explained

If you’re thinking of investing in a real estate syndication, you’re probably looking to evaluate the type of return you’ll receive on your investment. But you may find yourself soon swimming in a variety of numbers and acronyms.

It always bothered me that I couldn’t get a straight answer when I asked about returns, just “IRR this” and “EM that.” I kept hearing something about cash, too, but a lot less often than the other numbers. So, let’s break these concepts down one by one.

IRR stands for “internal rate of return.” In layman’s terms, this figure is the return that investors receive taking into account how quickly it accrues. For example, if I borrow $10 from you and pay you back $20 the next day, chances are you’d be pretty happy with the transaction.

Internal Rate of Return (IRR)

So, the first, quicker transaction would have a higher IRR than the second, slower one. Put another way, the IRR correlates positively with how quickly you receive your returns.

This statistic represents the relationship between the money that you invest and the money that you receive back expressed as a multiple. In the previous example, in which I borrow $10 from you and return $20 to you, the equity multiple would be 2x.

Equity Multiple (EM)

Unlike the IRR, the EM doesn’t take into account the amount of time that elapses between an investment and the receipt of the return on it.

So, in the example, the first transaction would have a higher IRR with a 2x EM, and the second transaction would have a lower IRR with a 2x EM. I like to look at these numbers together because they can tell very different stories.

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