15% IRR and a 1.8x equity multiple on the same page. Isn't that the same number twice?

Question

Looking at my first LP deal instead of another flip, and the summary page has three numbers stacked on top of each other. 15% IRR, 1.8x equity multiple, 8% average cash-on-cash. On my own deals I only ever track cash in and cash out, so I assumed the IRR and the multiple were two ways of saying the same thing and the sponsor just wanted two big numbers on the page.

Someone on another forum said IRR can be pumped up by selling early and that the multiple is the number that can't be gamed. That doesn't sound right either, since selling early has to mean less total money. Minimum here is $50k so I'd like to know what I'm reading before I wire anything.

Rena Guide · Accepted Answer

Equity multiple is total dollars out divided by dollars in, and it ignores time entirely. Put in $100,000, get $180,000 back over the life of the deal, that's 1.8x. IRR asks when each of those dollars arrived. That same 1.8x over five years works out around 12 to 13 percent IRR, and stretched over eight years it falls toward 8 percent. Both numbers are true at once; they answer different questions.

Cash-on-cash is narrower again. It's only the distributions from operations divided by your invested capital, so 8 percent cash-on-cash means roughly $8,000 a year on a $100,000 position while the property is running, before any sale.

Your forum friend has half of it. A quick sale does raise IRR for a given multiple, and it doesn't make the multiple bigger, so the two aren't interchangeable and neither one alone tells you much. The part that matters more for you: in most of these projections the majority of the IRR arrives at the exit, not in the quarterly checks. A deck showing 8 percent cash-on-cash and 15 percent IRR is telling you the gap comes from sale or refinance proceeds, which only exist if the property sells at the price they modeled. So ask for the assumed hold period and the exit cap rate in writing.

And all three are projections. Syndications commonly target something in the 7 to 12 percent annualized range, and what a given deal pays depends on the sponsor and the asset.

brandonlee36 · Answer

The exit-heavy thing is what got my attention when I started reading these. On my own small buildings the return shows up every month whether I like it or not. In an LP deal you can sit through four years of 6 percent distributions and the whole question of whether it was a good investment is still unanswered until the sale closes. Different kind of waiting than owning.

laurenkim53 · Answer

So a slow deal and a fast deal can hand me identical dollars and look completely different on that summary page.

samantha_ruiz · Answer

Run the reverse of what rena-guide said, because that's where the pain lives. Sponsor models a five year hold, market doesn't cooperate, they extend to seven or eight. Your 1.8x might survive that, the 15% IRR does not, and meanwhile your $50k sat there two extra years earning nothing new. Every deck I've read has language letting the GP extend the hold at their discretion, usually one or two one-year extensions. Find that clause before you look at the returns page again.

paulgrant17 · Answer

Dumb clarifying question: when the deck says 15% IRR, is nobody sending me 15 percent of $50k in year one? Because that's how I read it at first.

raj_mehta14 · Answer

Notes rather than equity, and the IRR question keeps tripping me the same way. On a note the payments are a schedule, so the timing is written down at the start. Here the timing is a guess about a sale that hasn't happened. Feels like the same math word doing two very different amounts of work.

marcus_hale41 · Answer

Two things I ask for before the returns page means anything to me. First, is the IRR net to the LP after the sponsor's promote and fees, or gross to the deal? Those can be three or four points apart and plenty of decks don't say which. Second, ask for a sensitivity table showing the exit cap 50 and 100 basis points above what they underwrote. If the 15% falls to 6% at plus 100, that tells you the deal is a bet on the sale price and not much else. Some sponsors send it over the same day. Some get vague, which is also information, flint.

15% IRR and a 1.8x equity multiple on the same page. Isn't that the same number twice?

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