If so, you might want to focus on deals that offer a relatively high IRR, though your money has less time to grow, and the returns may not be as high as those offered by other deals. Again, we all want to make money, but do you want your returns to be rapid so that you can make another investment or use your money for something else? These statistics also provide a good framework for taking stock of your investment goals. I like to look at these numbers together because they can tell very different stories. So, in the example, the first transaction would have a higher IRR with a 2x EM, and the second transaction would have a lower IRR with a 2x EM. Unlike the IRR, the EM doesn’t take into account the amount of time that elapses between an investment and the receipt of the return on it. In the previous example, in which I borrow $10 from you and return $20 to you, the equity multiple would be 2x. This statistic represents the relationship between the money that you invest and the money that you receive back expressed as a multiple. I’ll provide a more concrete example in a moment.Īnother number that you often hear mentioned is the equity multiple or EM. I keep my eye on the IRR but don’t try to work it out myself. I think of it as the creatinine clearance of real estate syndications. People usually don’t try to calculate this statistic because doing so requires spreadsheets and a bunch of equations. Put another way, the IRR correlates positively with how quickly you receive your returns. So, the first, quicker transaction would have a higher IRR than the second, slower one. However, if I borrowed the $10 and gave you back the $20 six months from now, you’d probably be less happy with it. For example, if I borrow $10 from you and pay you back $20 the next day, chances are you’d be pretty happy with the transaction. IRR stands for “internal rate of return.” In layman’s terms, this figure is the return that investors receive taking into account how quickly it accrues. So, let’s break these concepts down one by one. It always bothered me that I couldn’t get a straight answer when I asked about returns, just “IRR this” and “EM that.” I kept hearing something about cash, too, but a lot less often than the other numbers. In the end, what we really care about is how much money ends up in our pockets, right? This article summarizes briefly the returns on these investments. Right now, though, more and more docs are investing in real estate syndications. For most of us doctors, who have little to no financial education, it’s like looking at Latin, or maybe a diagram of the urea cycle-though I’m told a few docs still remember how that works, and I’m sure it’ll be useful someday. It’s hard enough for seasoned stock investors to keep track of these details. In the discussion of real estate syndications, a lot of numbers and acronyms get thrown around. This guest post, submitted by site sponsor Ascent Equity, a real estate company founded by three physician investors, takes a look at these numbers and sheds some light on the situation. How do you make sense of what numbers mean what? And which return calculations do the savviest real estate investors pay attention to most often? But you may find yourself soon swimming in a variety of numbers and acronyms.
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