Common Real Estate Return Metrics

This learning series on Modern Commercial Real Estate Investing first appeared on the EquityMultiple blog. Please check in there for updates and additions to this series.

As with any asset class, real estate investors need uniform ways to evaluate and compare the target (ex ante) and realized (ex poste) returns of real estate investments. Private real estate has historically exhibited low correlation with public markets. Many institutional investors regard private commercial real estate — with its illiquidity and inherent worth — as an opportunity to de-correlate from public markets and reduce exposure to systemic risk at the portfolio level.

Professional commercial real estate investors make use of a handful of return metrics. All are useful, but none are sufficient on their own to determine the relative appeal of a real estate investment. This article breaks down common return metrics in the context of private real estate investment, and their application and limits. Before diving in, note that ex ante return figures are based on assumptions and modeling; return figures are only as good as these assumptions, models, and the team doing the modeling.

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Cash-on-Cash Return

This metric (also commonly referred to as the “cash yield” of an investment) can be represented as a simple equation:

Cash on cash return = (Annual Dollar Income) / (Total Dollar Investment)

As such, this return metric provides a clean, quick way of assessing the magnitude of cash distributions throughout the lifetime of the project. Implicit in the formula is that this return metric is an average across every year the project encompasses. For example…

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