# Total return, IRRIRRThe Internal Rate of Return is the discount rate that makes a project's net present value equal zero. It expresses an investment's expected annualized return.Voir la définition complète → and equity multiple in a real deal package
A sponsor raises $10 million of equity to buy a 120-unit apartment complex in Phoenix, renovates the units over three years, pushes rents up 18%, and sells in year five. The pitch deck says "22% IRRIRRThe Internal Rate of Return is the discount rate that makes a project's net present value equal zero. It expresses an investment's expected annualized return.Voir la définition complète →, 2.1x equity multiple." Both numbers come from the same cash flow schedule, but they answer different questions, and investors who read only one of them get a distorted picture of the deal.
IRR (internal rate of return) measures the annualized rate of returnrate of returnReturn on Investment: the ratio of net profit to the cost of an investment. A 300% ROI means each dollar invested returns $3.Voir la définition complète → on invested capital, accounting for the timing of every cash flow in and out. It answers: "what compounding rate makes this deal's cash flows work out?"
Equity multiple measures total cash returned divided by total cash invested, with no regard for timing. It answers: "for every dollar I put in, how many dollars do I get back?"
A deal can post a high IRRIRRThe Internal Rate of Return is the discount rate that makes a project's net present value equal zero. It expresses an investment's expected annualized return.Voir la définition complète → with a mediocre multiple (fast money, not much of it) or a strong multiple with a modest IRRIRRThe Internal Rate of Return is the discount rate that makes a project's net present value equal zero. It expresses an investment's expected annualized return.Voir la définition complète → (patient money, a lot of it). Sponsors who only quote IRRIRRThe Internal Rate of Return is the discount rate that makes a project's net present value equal zero. It expresses an investment's expected annualized return.Voir la définition complète → can hide a deal that returns your capital quickly but doesn't generate much absolute profit.
Assume the following levered (after-debt) cash flows to equity investors, in $ millions, on a $10 million equity check:
| Year | Cash Flow to Equity |
|------|---------------------|
| 0 | (10.0) |
| 1 | 0.4 |
| 2 | 0.5 |
| 3 | 0.6 |
| 4 | 0.7 |
| 5 | 14.2 (includes sale proceeds) |
Year 5's $14.2 million combines the final year's operating distribution (roughly $0.7 million) with net sale proceeds of about $13.5 million after paying off the remaining loan balance and transaction costs.
Equity multiple = total distributions ÷ total invested capital.
Total distributions = 0.4 + 0.5 + 0.6 + 0.7 + 14.2 = $16.4 million
Total invested = $10 million
Equity multiple = 16.4 / 10 = 1.64x
That means every $1 invested returned $1.64 total (your original dollar plus $0.64 of profit). This is sometimes called MOIC (multiple on invested capital), a term you'll see interchangeably in private equity and real estate decks.
IRRIRRThe Internal Rate of Return is the discount rate that makes a project's net present value equal zero. It expresses an investment's expected annualized return.Voir la définition complète → is the discount rate that makes the net present value (NPV) of all cash flows equal zero:
0 = -10.0 + 0.4/(1+r) + 0.5/(1+r)^2 + 0.6/(1+r)^3 + 0.7/(1+r)^4 + 14.2/(1+r)^5You solve this by trial and error or with software. In Excel or Google Sheets, the formula is simply:
=IRR({-10.0, 0.4, 0.5, 0.6, 0.7, 14.2})Working it by hand with two trial rates: at r = 10%, the discounted sum comes out positive (NPVNPVNet Present Value is the sum of an investment's future cash flows discounted to today, minus the initial outlay. A positive NPV signals value creation.Voir la définition complète → above zero), meaning the true rate is higher. At r = 11%, it's close to zero. This deal's IRR is approximately 11%, not the 22% a sponsor might tout on a *gross*, pre-fee, unlevered basis. That gap between "headline IRRIRRThe Internal Rate of Return is the discount rate that makes a project's net present value equal zero. It expresses an investment's expected annualized return.Voir la définition complète →" and "actual net-to-LPLPA standalone web page built for a single campaign goal, designed to maximise conversions by removing distractions and focusing visitors on one action.Voir la définition complète → (limited partner) IRRIRRThe Internal Rate of Return is the discount rate that makes a project's net present value equal zero. It expresses an investment's expected annualized return.Voir la définition complète →" is one of the most common sources of investor disappointment. Always ask: is this IRRIRRThe Internal Rate of Return is the discount rate that makes a project's net present value equal zero. It expresses an investment's expected annualized return.Voir la définition complète → levered or unlevered, gross or net of fees?
Consider two deals, both showing an 18% IRRIRRThe Internal Rate of Return is the discount rate that makes a project's net present value equal zero. It expresses an investment's expected annualized return.Voir la définition complète → over five years:
Same IRRIRRThe Internal Rate of Return is the discount rate that makes a project's net present value equal zero. It expresses an investment's expected annualized return.Voir la définition complète →. Deal B carries far more exit risk, the danger that market conditions (interest rates, cap rates, rent growth) at the sale date differ from the underwriting assumptions. IRRIRRThe Internal Rate of Return is the discount rate that makes a project's net present value equal zero. It expresses an investment's expected annualized return.Voir la définition complète → rewards getting money back sooner; it doesn't penalize concentration of risk in a single terminal event. This is why professional underwriters always look at IRRIRRThe Internal Rate of Return is the discount rate that makes a project's net present value equal zero. It expresses an investment's expected annualized return.Voir la définition complète → and multiple together, plus a sensitivity table on exit cap rate and hold period.
Value-add multifamily and core-plus deals in the US and Europe have shown these approximate return targets, based on typical sponsor underwriting and industry surveys such as PREA's investor return expectations and CBRE research notes:
These compressed after the 2022 to 2023 rate-hiking cycle pushed underwriting hurdles up across both regions; always check current sponsor decks and data providers like NCREIF (US) or INREV (Europe) for live benchmark data rather than relying on stale figures.
Vérification des acquis
1. What fundamental distinction explains why IRR and equity multiple can tell different stories about the same deal?
2. A sponsor pitches a deal with a 25% IRR but only a 1.3x equity multiple. What does this combination most likely indicate?
3. Why might quoting only IRR in a pitch deck be potentially misleading to investors?
4. Select ALL correct answers about equity multiple as a return metric.
Sélectionnez toutes les réponses correctes.
5. Select ALL correct answers about scenarios where a deal could show a strong equity multiple but only a modest IRR.
Sélectionnez toutes les réponses correctes.
When you open an actual offering memorandum, check these in order:
1. Is the IRR levered or unlevered? Levered IRRIRRThe Internal Rate of Return is the discount rate that makes a project's net present value equal zero. It expresses an investment's expected annualized return.Voir la définition complète → reflects the effect of debt financing; it's usually higher than unlevered IRRIRRThe Internal Rate of Return is the discount rate that makes a project's net present value equal zero. It expresses an investment's expected annualized return.Voir la définition complète → when debt cost is below the property's return, a relationship called positive leverage.
2. Is it gross or net of fees? Sponsors typically charge an asset management fee (1% to 2% of equity annually) and a promote or carried interest (a share of profits above a hurdle, often 20% above an 8% preferred return). Net-to-LPLPA standalone web page built for a single campaign goal, designed to maximise conversions by removing distractions and focusing visitors on one action.Voir la définition complète → IRRIRRThe Internal Rate of Return is the discount rate that makes a project's net present value equal zero. It expresses an investment's expected annualized return.Voir la définition complète → can run 2 to 4 percentage points below gross IRRIRRThe Internal Rate of Return is the discount rate that makes a project's net present value equal zero. It expresses an investment's expected annualized return.Voir la définition complète →.
3. What's the multiple, and how front- or back-loaded is it? A 1.8x multiple concentrated 90% in the final year's sale is riskier than the same multiple spread across annual distributions.
4. What exit cap rate is assumed? If the sponsor buys at a 5.5% cap rate (net operating income divided by purchase price) and underwrites an exit at 5.0%, that 50 basis point compression is doing real work in the return; ask what happens if the exit cap rate matches the entry cap rate instead.
🎬 [VIDEO: "IRRIRRThe Internal Rate of Return is the discount rate that makes a project's net present value equal zero. It expresses an investment's expected annualized return.Voir la définition complète → vs Equity Multiple Explained" - https://www.youtube.com/results?search_query=irrirrThe Internal Rate of Return is the discount rate that makes a project's net present value equal zero. It expresses an investment's expected annualized return.Voir la définition complète →+vs+equity+multiple+real+estate - a walkthrough of both metrics using a simple cash flow example, useful for reinforcing the hand calculation above]
If you only remember one shortcut: for a simple deal with no interim cash flow, IRRIRRThe Internal Rate of Return is the discount rate that makes a project's net present value equal zero. It expresses an investment's expected annualized return.Voir la définition complète → approximately equals (equity multiple)^(1/years) minus 1. Applying that to our deal as an approximation (ignoring the interim distributions for simplicity): 1.64^(1/5) minus 1 is approximately 10.4%, close to the 11% we solved for precisely. This rule of thumb breaks down when interim cash flows are large, but it's a fast way to catch an obviously mismatched IRRIRRThe Internal Rate of Return is the discount rate that makes a project's net present value equal zero. It expresses an investment's expected annualized return.Voir la définition complète → and multiple in a pitch deck.
=IRR()