Commercial Real Estate Investing From A-Z What is Cash on Cash, IRR, and REIT's?
Today we are covering what is the difference between Cash on Cash and IRR, what are REIT's, and what are the pros and cons from an investor's perspective.
Read this interview here: http://montecarlorei.com/episode-23-what-is-cash-on-cash-irr-and-reits/
We're interviewing Jason Ricks, a professional real estate investor focusing on acquisitions, leasing, construction, and development. He has a background in retail leasing and asset management working on premier properties worth hundreds of millions across the country. He also oversaw a 2.2 million square foot value add retail portfolio throughout Texas and Oklahoma, and most recently he was featured in the number one Amazon best selling book Desire, Discipline and Determination.
What is the difference between cash on cash and IRR?
These are both really common metrics that a lot of investors use when evaluating real estate. One of the beauties of commercial real estate, or income producing real estate, is the cashflow. Cash on cash is a snapshot of the percentage return of your cash invested. Imagine that you invested $100,000 into a shopping center. In year one you got a cash flow check of $10,000, so what type of return is that on your investment? That's going to be a 10% cash on cash return and this is usually quoted on a before tax basis. What that does is that it gives you a nice snapshot of the initial return that you're going to get on your investment, which a lot of investors are curious about, especially when you evaluate this against, for example, a stock dividend or a coupon. That's one of the exciting things about commercial real estate - that cash on cash income producing, and cash on cash gives you a nice snapshot of the IRR.
Internal rate of return gives you the full picture, the comprehensive picture. And the way that's done is if you own, let's say a shopping center over a period of five years, you're going to have very different cash flows. And whenever you decide to sell the building, you're going to have a big chunk of sales proceeds. How do you evaluate a return on your investment over a five year period, taking into account the time value of money? That's what the IRR does. It gives you a nice picture of your yield. A lot of times investors will look at IRR before making an investment, and it's primarily a proforma. So it will say, here's my crystal ball and here's where I think cash flows are going to be, here's where I think we're going to end up going on an exit cap, and this is going to be the sales proceeds. And what's nice about it is that it gives you an opportunity to evaluate it against other investment vehicles.
What are REIT's and what are the pros and cons of investing in a REIT from an investor's perspective?
REIT's came about in the 60's and at that point only accredited investors were really engaged in commercial real estate, REIT's then allowed non-accredited investors to invest in commercial real estate. This can be done in either debt or equity REIT's, and these can either be private or public. To qualify for a REIT there are a lot of requirements, and a ton of reporting. 90% of its taxable income has to be in the form of shareholder dividends, and you have to invest 75% of your assets in real estate cash or US Treasuries. As an individual investor that's unaccredited, what's fantastic about REIT's is that gives you broad based diversification and exposure to commercial real estate, plus just like any other publicly traded stock, it's liquid, meaning that you can get in and get out very quickly.
Unfortunately, REIT’s don’t offer much in the form of capital appreciation. They’re very dividend heavy focused. And those dividend checks that you do get from REIT’s are going to be taxed as regular income.
Jason Ricks
jason@concordiarealty.com