Our preceding article discussed BLVD’s Buying Process including how we source deals and our evaluation methods. This week, our focus shifts to the return metrics shaping our assessments, such as cash-on-cash return, internal rate of return (IRR), and equity multiple. Before submitting a Letter of Intent (LOI), every deal undergoes rigorous scrutiny based on these key metrics.

Cash-on-Cash

A healthy cash-on-cash return is perhaps the most difficult return to achieve in today's market, primarily due to high debt costs and sellers' inflated property valuations. Essentially, cash on cash return reflects the cash flow generated from the property relative to the initial investment. For instance, if you invest $100k in an apartment building and it yields $6k after expenses, your cash-on-cash return is 6%. We focus on achieving a strong average cash-on-cash return. This represents the average return throughout ownership. For example, if we hold a property for five years and a $100k investment generates a total of $30k in cash flow, the average return remains at 6%, despite potential variations from year to year.

Internal Rate of Return

The Internal Rate of Return represents the total rate of return, factoring in the time value of money. The sooner capital is returned, the higher the IRR. For instance, if you sell in year 3 and receive the same amount as in year 5, the 5-year hold would yield a lower IRR. The Internal Rate of Return is an easier metric to achieve than Cash-on-Cash if there's an expectation that interest rates will decrease during the holding period. Our current approach to deal underwriting assumes interest rates will stay the same. Savvy investors prioritize this metric because they understand quicker capital returns allow for faster reinvestment.

Equity Multiple

The Equity Multiple represents the ratio of total cash distributions received from an investment to the total equity invested. Essentially, it indicates how much profit an investor could make on their initial investment. For example, if you invest $100k and receive $190k back, the equity multiple would be 1.9x. Unlike IRR, the Equity Multiple doesn't consider time. Therefore, while a deal boasting a 3x equity multiple might appear attractive, if it's over a 20-year hold period, the seemingly high multiple may not be as favorable.

If We Had to Choose One…

If we had to prioritize one metric as the most important, it would be cash-on-cash return. It's relatively straightforward to forecast in the short term. In contrast, both IRR and equity multiple incorporate proceeds from a sale, typically occurring 5+ years in the future. Predicting the selling environment at that time can be challenging. Additionally, higher IRR often correlates with increased risk, whereas accurately underwritten cash-on-cash returns can sometimes offer higher returns without necessarily entailing significantly more risk.

Our Performance Metrics

Currently, we expect to achieve a 6% cash-on-cash return, a 15% Internal Rate of Return (IRR), and a 2x equity multiple. However, there are instances where trade-offs occur among these metrics. For example, we might opt for an 8% cash-on-cash deal with a 14% IRR or consider a 1.5x equity multiple deal offering a 17% IRR due to its shorter holding period. Nonetheless, our general benchmarks remain at 6% cash on cash, 15% IRR, and 2x equity multiple.

We are working on securing a deal shortly that meets these performance metrics so be sure to join our investor club if you are interested in investing along side us!

Thank you for reading and your interest in BLVD Ventures. We look forward to having you follow along. Feel free to reach out anytime with questions and connect with us further using the button below.