At Metonic, we measure future projections and the success of our properties in financial measurements. Our team strategically lays out the monetary plan for 5-15 years (depending on the hold period), in the underwriting of each property. From the extremely intensive underwriting summary is where we generate projected investment returns, such as Equity Multiple, Average Annual Cash Yield, and Cap Rate. If you’re not in the finance world, these terms may get a bit confusing. In this blog, we’re going to define these terms and discuss how they’re evaluated.
Equity Multiple = Total Distribution / Total Invested Capital
Equity multiple is best described as the return you get from your initial investment. Metonic’s average equity multiple is 2.9x, meaning if you invest $100,000 in a multifamily property with a 10-year hold period, you will get approximately $290,000 distributed over 10 years.
Average Annual Cash Yield = Annual Net Cash Flow / Invested Equity
The average annual cash yield as all operating income that comes off of a property during any annual period, including refinance proceeds returned to investors. Metonic’s average annual cash yield returned to investors is 14%. This means an investor will receive approximately 14% of initial investment on any given year during the hold period. Cash return is not always linear, and some years may be higher than others, but 14% represents the average.
Cap Rate = Property’s Annual Net Operating Income / Purchase Price
A property’s cap rate is the percentage of return on investment after purchasing. For example, if a property was purchased at $5 million dollars and it generates $375,000 of net operating income a year (NOI), the property’s cap rate would be 7.5%. Bonus Term – NOI: NOI, or net operating income, is referred to as the bottom line of income after subtracting taxes, property expenses, and other deductions.
Though these terms may get complicated, they’re essential in providing our partners with expected returns on our properties. As always, if you have any questions regarding returns or the investment process, please visit our website or reach out at Metonic.net.