Performance measurement of real estate investments is achieved through the use of indicators. The most important indicators are the Internal Rate of Return (IRR), the Equity Multiple and the gross profit (nominal value).
The shorter the deal is, the better indicators will be the equity multiple and the gross profit.
For deals that would last more than seven years, the most important is the weighted average annual rate of return. This notion is reflected in the Internal Rate of Return.
In order to get a sensitive approach of profitability, it is important to combine all the indicators, before and after leverage.
- EQUITY MULTIPLE: Number of times we get back the equity. When it is equal to one, we make no profit; when it is equal to two, we double equity.
- INTERNAL RATE OF RETURN: annual weighted average discount rate (computed for the whole investment duration). This indicator includes both rental incomes and capital gain arising from the asset sale.