An 11 percent target IRR against a REIT paying 4 percent, what is actually being compared

Question

Comparing a targeted return from a private deal to a public REIT's dividend yield looks like an apples to apples exercise and rarely is. Take a five year multifamily equity offering with an 11 percent target IRR, a 1.5x equity multiple, distributions starting in year two, a 10,000 minimum and no exit before sale, set next to a residential REIT paying roughly a 4 percent dividend yield that can be sold before lunch. Lined up that way the private deal looks like it wins by a mile, which usually means the comparison is wrong rather than the deal being better. The 11 percent is a sponsor's target, not a delivered return, and the 4 percent is only the paid dividend, leaving out price movement entirely. The honest comparison is the target IRR against the REIT's total return including price change, which historically has not sat at 4 percent. Timing matters too. IRR rewards early cash flow, so a structure that defers distributions to year two will show a lower IRR than the same total dollars paid out sooner, while a REIT typically starts paying the quarter it is purchased. There is also a dimension that resists a single number: liquidity. A REIT position can be sold at will; a 10,000 commitment in a five year vehicle is locked for five years and potentially longer if the exit slips. When the return profiles differ this much on liquidity and timing, equity multiple is often the more honest single number to lean on, since 1.5x over five years can be stated without arguing about cash flow timing, even though it throws away timing information entirely.

paulgrant17 · Answer

I'd start by asking whether the 11% is before or after the platform's fees, because on the two offerings I read the target was stated gross and the fee schedule was on a different page.

tashaford30 · Answer

There's no clean way to put a single number on the liquidity gap. A better approach is deciding how much capital can go untouched for five to seven years, treating that as a separate bucket from money that needs to stay sellable, and only comparing deals inside that bucket against each other. A REIT and a locked equity deal aren't competing for the same dollar under that framing. Does that dodge the original question? Probably. But comparing a locked position to a liquid one in the same spreadsheet tends to overrate the locked one every time.

Rena Expert · Answer

The comparison breaks down at three points, and it's worth being precise about each.

First, target versus realized. An 11% target IRR is a sponsor's projection built on assumptions about rent growth, exit cap, and hold period. A REIT's dividend yield is a payment that already happened. Comparing a projection to a realized figure will favor the projection every time. If you want the comparison to mean anything, ask the sponsor for realized IRRs on their closed deals against the original targets on those same deals, and compare that spread to the REIT's total return over a similar span.

Second, IRR is time-weighted on cash flows and is highly sensitive to when money moves. A deal that returns capital early can show a strong IRR on modest total profit, and a deal that defers everything to sale can show a weak IRR on the same profit. Your 1.5x equity multiple over five years is a cleaner statement of total dollars, and holding both numbers is the standard practice for exactly the reason you named.

Third, and this is the assumption the whole comparison rests on, IRR is usually quoted before the investor's own tax treatment and often before platform-level fees. Whether it is net of sponsor fees varies by offering, and you have to read the specific offering to know. The tax character of what you receive depends on the structure and your own situation, which is a question for your tax professional.

The liquidity difference has no clean number. You can sell the REIT at a price you may dislike. On a project-based deal with a two to seven year lockup you have no price and no exit at all until the sponsor sells.

brandonlee36 · Answer

Hold period slipping is the thing to watch closest. A deal underwritten to a five year hold that stretches to seven keeps the same total dollars spread over two more years, and that alone turns a decent IRR into a mediocre one, with no lever for the investor to pull from where they sit. The discipline worth building is to take any target IRR and mentally add a couple of years to the hold before deciding whether the number still holds up. Most deals stop looking as exciting once that adjustment is made.

laurenkim53 · Answer

Thicket's two year haircut is the most useful frame in this thread. A rough version of that discount applies well in small rural markets, where the exit buyer pool is thin enough that a slip is likely rather than possible.

kevin_lombard · Answer

I read this thread twice and want to check I have the basics right. IRR is a percentage that accounts for when cash arrives, equity multiple is just total dollars back divided by dollars in with no timing in it, and dividend yield on a REIT is annual payment divided by share price and says nothing about the share price going up or down. Is that all correct?

If so, then a 1.5x multiple over five years and a 1.5x over seven years are the same multiple and very different investments, which is what thicket was saying.

karen_whitfield · Answer

Juniper, that's right on all three.

Ledger, I hold land for long stretches and my answer to your question is that I compare the worst plausible case, not the target. On the REIT the worst case is I sell down 40% in a bad year and I have my money. On the five year deal the worst case is the sponsor loses the equity and I get a letter. Those aren't the same shape of loss, and no single comparison number holds both. I'd rather size the position so the letter version doesn't hurt me than find a metric that makes them look comparable.

tylerbrooks9 · Answer

Take the unglamorous side. An investor who owns the REIT understands what they own by Thursday afternoon and can be wrong cheaply. The deal requires being right about a sponsor never met, on a projection that can't be audited, with five years to find out. That doesn't make the deal worse. It means the amount of homework between an investor and an informed decision is completely different, and homework capacity is the binding constraint, not capital.

An 11 percent target IRR against a REIT paying 4 percent, what is actually being compared

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