Ranking the 5 Most Common Real Estate Return Metrics

There are many different ways investors can measure investment performance. In this video, I will rank the five most popular return metrics in commercial real estate analysis.

Spoiler !!!

0:00 Intro
1:05 Cap Rate
5:09 Equity Multiple
8:11 IRR
12:18 Cash-on-Cash Return
16:12 Yield-on-Cost
19:13 Final Ranking

Disclaimer: The information presented in this video is intended solely for educational and learning purposes. It is not to be construed as professional investment advice. The content provided in this video is based on hypothetical scenarios, general market trends, and analytical techniques commonly used in real estate analysis. Any examples, case studies, or projections discussed are for illustrative purposes only and should not be considered as guarantees of future performance or outcomes.

[markc]

Pretty spot on with this. YoC is clearly the best metric to sensitize, especially in today's environment. I have EM higher on the list; if you're comparing projects with similar deal profile and hold period, multiple is a simple and helpful metric to look at.

[TheDude-vxwn]

Excellent video! Any books or capital market websites you recommend to read more about this?

[anthonyminniti]

Love it, in your opinion how much of a higher YOC spread would you need for a ground up development vs a stabilized asset? Or what have you seen in as industry standard?

[nickbouquet]

Hi Ike: Regarding Yield-on-Cost (also my favorite metric), I have a couple of questions I would like your opinion on 1.) You state the denominator in YoC as CAPEX + Purchase Price. Should you include all of your unlevered cost basis in this number (closing costs/reserves or carry costs)? I've also seen people use the total project basis (levered + unlevered cost basis) as the denominator for this calculation. Using this approach would create a more 'conservative' output on the YoC calculation, but I am curious about your thoughts on this. Second, I look at YoC at stabilization (annualized NOI at renovation completion month for a value-add project) and also look at the YoC at the exit month. In your opinion, what timeframe of the YoC is most relevant for value-add projects? Thanks!

[mcdominy]

When using T3/T12 annualized to calculate a Cap Rate are you not concerned about seasonality? Or is it because these are assumed to be 12-month rental contracts so it doesn't matter? I come more from a hotel underwriting background so that is where this question comes from :) And great video by the way

[Walina-gvph]

A cap rate is not a return metric. If you have the purchase price why would you waste time trying to calculate a cap rate?