What are the Average Returns on a Multifamily Real Estate Investment? Find Out.

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What Are the Average Returns on a Multifamily Real Estate Investment

Investing in multifamily real estate is one of the most popular ways to generate cashflow and create wealth. Be it recession or boom, demand for housing is always going to be there. Food, clothing and housing are the basic human needs after all. The good news is that it doesn’t require too much of capital to invest in multifamily real estate. One can start with capital from $25,000-50,000, investing with a multifamily real estate syndication.

Most times, multifamily real estate syndication companies acquire large deals and open it for individual investors.

In the value-add model, the syndicator seeks out properties with a positive cash flow and devises a plan to maximize the returns for investors. Once purchased, the syndicator puts the property into action and adds value in terms of renovations, repairs and more facilities. By taking part in the cash dividends over the course of the project (typically 3–7 years), passive investors have a lot to gain. In addition, they can split the earnings from the forced appreciation, which is the ultimate driver.

So, what is the average return for multifamily investors? By going over three key performance indicators (KPIs), we will be able to answer this question.

1. Cash-on-Cash Return

Your return on investment is gauged by your cash-on-cash return (ROI). It is calculated annually by simply dividing the cash flow you receive by the amount you invested initially. What is a good cash on cash return for multifamily investments? Try this approximation for size: when an investor contributes $100,000 to a syndication opportunity (typical for a syndication opportunity); during the first year, the investor receives payouts totaling $8,000. As a result, $8,000 divided by $100,000 results in an investment return of 8% (8% Cash-on-Cash Return).

An annual Cash-on-Cash Return of 5% to 10% is normal for a value-added multi-family syndication opportunity. As the sponsor puts the plan for optimizing the property into action, the Cash-on-Cash Return rises for every year that you are in the agreement. The Cash-on-Cash Return will normally average around 8% per year through the course of the investment.

Bear in mind that the Cash-on-Cash Return does not account for the substantial profit from the sale or refinancing of the property at the end of the investment period. Your average annual return on this investment vehicle will increase to 18% to 22% yearly when the average annual return, which does take into account the profit at sales.

Also Read: AAR Vs. IRR: Multifamily Real Estate Terms Investors Must Understand

2. Equity Multiple

The Equity Multiple is  best explained using the Las Vegas analogy. Imagine, you are travelling to Vegas to play the roulette table. You wager $100,000 on black, and if you win, there is an additional $100,000 in it for you. Therefore, your financial situation improved double. With equity multiple, everything is that straightforward. This indicator reveals by how much your initial investment was multiplied.

Let’s examine a real-world investment example. You put in $100,000 at the start of a five-year investment. Your annual share of the cash payouts is as follows:

  • Year 1 = $6,000
  • Year 2 = $7,000
  • Year 3 = $8,000
  • Year 4 = $9,000
  • Year 5 = $170,000 ($10,000 in cash flow plus $160,000 in distributions from sales revenues).

The main prize at the end is your portion of the sale’s earnings, which comes to $160,000. Summarizing everything, the sponsor added $200,000 to your initial contribution. Divide the $200,000 by the $100,000 initial investment, and the result is 2, or a 2.0x equity multiple.

This demonstrates that your initial investment in this multifamily property has quadrupled throughout the course of the investment. I don’t know about you, but I think it’s amazing to double your investment in five years without doing much work! not to mention the tax advantages, but that is another topic.

As a passive investor, you should typically realize an Equity Multiple 1.7x to 2.5x on a 5-year investment. Anything below 1.7x is most likely not worth your time or money. Anything over 2.5x is probably too good to be true, and you should exercise caution before investing.

3. Internal Rate of Return

The discount rate that brings the Net Present Value (NPV) of all cash flows to zero is known as the internal rate of return (IRR). It is a computation of the anticipated annual growth rate of an investment. The formula goes something like this-

Internal Rate of Return (IRR) formula for real estate investments

The NPV is set to zero to calculate the IRR. Now crunch that formula into a calculator! Therefore, IRR determines the annual growth rate of your investment. You should  also consider the time value of money and how much anything is worth right now compared to in the future. IRR is different from your yearly or average return; don’t confuse the two. The annual rate of return, or IRR, is a metric that includes all cash distributions, including sale or refinance proceeds.

A spreadsheet can be used to quickly compute the IRR. Put the following values into a list in a spreadsheet, for instance, using the same numbers from the previous example:

  • (100,000); negative $100,000, which represents the initial investment
  • Year 1 = $6,000
  • Year 2 = $7,000
  • Year 3 = $8,000
  • Year 4 = $9,000
  • Year 5 = $170,000(10,000 in cash flow plus $160,000 in distributions from sales revenues)

If you are using Microsoft Excel, enter “=IRR” and then make a note of the cells. Let the spreadsheet handle the rest . A value of 16% should be produced by your formula. Here is an illustration of how your spreadsheet should appear:

This demonstrates that your money is increasing by 16% a year. You should search for investments in the syndication world that have an IRR in the mid to high teens. Any IRR above 20% should be treated cautiously because the figure can have been inflated to draw in investors. Anything less than 13% is below what is reasonable for this kind of investment.

Utilizing all three of the performance indicators covered above provides a more comprehensive picture of the investment’s potential. You can decide what is a good IRR for multifamily investments and what is not, using these KPIs.

Also read: Difference Between 506(b) and 506(c) Deals

About Us

Fair Winds Capital Investments is a veteran owned and operated firm dedicated to providing safe and exceptional quality housing to our tenants. We aim to provide our partners with a shared ownership platform of low-medium risk alternative investments throughout the Southeast, with a partnership preference given to our fellow Servicemen seeking to add a diverse and bolstered income stream.

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