Return Metrics Explanation

Introduction: Understanding Return Metrics

Every commercial real estate deal has a story behind the numbers. Return metrics are how we translate that story into measurable performance. They don’t just tell you whether a deal “pencils” — they reveal the risk, timing, and potential upside. Here’s a breakdown of the key metrics every investor, lender, and owner should understand.

Internal Rate of Return (IRR)

The Internal Rate of Return is the heartbeat of a CRE investment. It measures the annualized rate of return over the entire life of the deal, taking into account the timing of all cash flows — both in and out. In simple terms, IRR answers: “If I put money in today and get distributions and a sale later, what’s my average yearly return?”

Typical Targets: Value-add multifamily deals often project 12–18% IRR, while core stabilized assets may be 6–9% IRR.
Why It Matters: IRR rewards deals that return capital faster. Two deals can have the same profit, but the one that pays out earlier will have a higher IRR.

Equity Multiple (EM)

If IRR shows timing, Equity Multiple shows total return on equity invested. It’s a simple ratio: total cash received ÷ total cash invested.

Example: Invest $100,000, get $200,000 back over time = 2.0x Equity Multiple.
Typical Ranges: Core/stabilized assets may project 1.5x–2.0x over a hold period; development deals or higher-risk projects may target 2.0x–3.0x or more.
Why It Matters: This metric ignores timing and focuses solely on total profit. It’s easy to understand and perfect for comparing across multiple deals.

Cash-on-Cash Return (CoC)

Cash-on-Cash Return measures the annual cash yield relative to the equity invested. It’s basically: annual cash flow ÷ equity.

Example: A $1,000,000 equity investment generating $80,000 in annual distributions = 8% CoC Return.
Typical Ranges: Stabilized multifamily assets often produce 6–8% annually; value-add assets may start lower and climb as operations improve.
Why It Matters: CoC tells you your “paycheck” each year — a critical metric for investors who want steady income, not just back-end profit.

Net Operating Income (NOI)

Net Operating Income is the property’s income after operating expenses but before debt service and taxes.

Why It Matters: Lenders and appraisers use NOI to calculate property value via the cap rate. If NOI increases, so does your property’s value.
Benchmarking: In multifamily, NOI margins typically run 50–65% of gross income, depending on market and asset class.

Capitalization Rate (Cap Rate)

Cap Rate is the ratio of NOI to purchase price or current value. It’s a snapshot yield assuming you paid cash.

Example: $500,000 NOI on a $10,000,000 purchase price = 5% Cap Rate.
Why It Matters: Cap rates show market sentiment. Lower cap rates mean higher valuations (and vice versa). They’re also the “quick and dirty” way to compare properties.

Debt Service Coverage Ratio (DSCR)

DSCR measures the cushion between NOI and annual debt service.

Example: $600,000 NOI ÷ $400,000 annual debt service = 1.5x DSCR.
Typical Requirement: Lenders usually require ≥1.20x–1.30x DSCR.
Why It Matters: DSCR indicates how comfortably a property can cover its loan payments — a key sign of risk for lenders and investors.

Loan-to-Value (LTV) and Loan-to-Cost (LTC)

While not “returns,” LTV and LTC show how much leverage is in the deal relative to value or cost.

Typical Ranges: 60–80% for stabilized assets, 60–75% for construction or bridge loans.
Why It Matters: Higher leverage can amplify returns but also risk. Understanding LTV helps investors see how much equity cushion is in the deal.

Stabilized Yield on Cost (or Development Yield)

This metric compares the property’s projected NOI once stabilized to total project cost.

Example: $1,000,000 stabilized NOI ÷ $12,500,000 total cost = 8% Yield on Cost.
Why It Matters: It shows whether your development or repositioning creates value versus simply buying at market yield.

Hold Period & Exit Assumptions

Every return metric depends on how long you hold the asset and at what price you sell. Knowing the hold period (3, 5, 7+ years) and the assumed exit cap rate is essential for evaluating projections. A deal with a high IRR but unrealistic exit assumptions may not deliver.

Why this matters

Each of these return metrics tells a different part of the story. IRR shows speed, Equity Multiple shows total payoff, CoC shows annual yield, and metrics like NOI, Cap Rate, DSCR, and LTV reveal the engine under the hood. Together, they give investors and owners a full picture of risk and reward.

At Trinity Capital, we break down every deal using these metrics so our clients see more than just numbers — they see a clear roadmap to profitability, timing, and long-term value creation.