There are multiple ways to help evaluate the return on your money.  Here’s a quick overview of some common metrics.

Cash on Cash (CoC) Return

The annual cashflow of the investment divided by the invested equity.  

Cashflow is what’s left over after subtracting debt service and other cash demands from a property’s net operating income.

 Example: 

You invest $100,000 and the property generates cashflow of $5,000/year.

 CoC Return = $5,000 / $100,000 = 5%

Average Annual Return (AAR) – The average return over the holding period including cash flows as well as proceeds from sale.  Divide all profits by the invested equity, then divide by hold period.  You can also calculate this by summing each yearly return and dividing it by hold period.

 Example: 

You invest $100,000 with a yearly cashflow of $5,000/year.  

After after 5 years the property is sold and you receive $120,000 in net sale proceeds.

AAR = ($5,000 * 5 + $120,000) / $100,000 / 5 = 29%

AAR = (5% + 5% + 5% + 5% + 125%) / 5 = 29%

Total Return – The sum of all profits (not including return of capital) over the life of the deal divided by the invested equity, expressed as a percentage.

 Example: 

You invest $100,000 and receive total distributions of $145,000 over the life of the deal.

Total Return = ($145,000 / $100,000) * 100% = 145%

Equity Multiple – The factor by which your investment has increased.  Divide total distributions (including return of capital) by invested equity.

 Example: 

You invest $100,000 and at the at the completion of the hold period you receive a total of $245,000 back (including the return of your initial $100,000).

 EM = $245,000 / $100,000 = 2.45

Internal Rate of Return – Measures the return on the investment taking into consideration the time value of money (the concept that money today is worth more than the same amount in the future).  

This is mathematically the most confusing metric (for me personally).  Luckily enough, modern spreadsheets like Excel and Google Sheets will calculate this for us!