Understanding Multifamily Investment Metrics: Cap Rates, Cash-on-Cash Returns, IRR, and Equity Multiples

In the world of multifamily real estate investing, making informed decisions requires a thorough understanding of key financial metrics. At PrimeX Capital, we believe that mastering these metrics is essential for evaluating investment opportunities, comparing different properties, and ultimately achieving your financial goals.

This comprehensive guide breaks down the four most critical multifamily investment metrics: capitalization rates (cap rates), cash-on-cash returns, internal rate of return (IRR), and equity multiples. We’ll explain how each metric is calculated, when to use it, its limitations, and how they work together to provide a complete picture of an investment’s potential.

Capitalization Rate (Cap Rate)

What Is a Cap Rate?

The capitalization rate, commonly referred to as the “cap rate,” is perhaps the most frequently used metric in commercial real estate. At its core, a cap rate represents the unlevered annual return on an investment property, expressed as a percentage.

How to Calculate Cap Rate

The formula for calculating cap rate is straightforward:

Cap Rate = Net Operating Income (NOI) ÷ Property Value (or Purchase Price)

For example, if a multifamily property generates an NOI of $500,000 and is valued at $10,000,000, the cap rate would be:

C Rate= 500,000÷10,000,000 = 0.05 or 5%

Components of the Cap Rate Calculation

To properly calculate a cap rate, you need to understand its components:

Net Operating Income (NOI) is the property’s gross potential income minus vacancy losses, credit losses, and operating expenses. Importantly, NOI does not include debt service (mortgage payments), capital expenditures, depreciation, or amortization.

Property Value is typically the purchase price for acquisition analysis or the current market value for existing investments.

When to Use Cap Rates

Cap rates are most useful for:

1.Quick Property Comparisons: Cap rates allow for rapid comparison of different investment opportunities on an unlevered basis.

2.Market Analysis: Tracking cap rate trends helps investors understand whether a market is heating up (cap rates compressing) or cooling down (cap rates expanding).

3.Exit Strategy Planning: Projecting future cap rates helps estimate potential sale prices at the end of the holding period.

4.Value Creation Measurement: By comparing going-in cap rates to exit cap rates, investors can quantify value created through operational improvements.

Limitations of Cap Rates

While useful, cap rates have several important limitations:

1.Ignores Financing: Cap rates don’t account for leverage, which can significantly impact actual returns.

2.Static Measurement: A cap rate is a snapshot in time and doesn’t reflect future growth or decline in income.

3.Excludes Capital Expenditures: Major repairs and improvements aren’t factored into the NOI calculation.

4.Market Variability: Cap rates vary widely between markets, property classes, and over time, making direct comparisons sometimes misleading.

Cap Rate Trends in Today’s Market

In 2025, we’re seeing cap rates for Class B/C multifamily properties in growth markets like Raleigh and Charlotte typically ranging from 4.8% to 6.0%, depending on property quality, location, and value-add potential. This represents a slight expansion from the compressed cap rates seen in 2021-2022, offering better entry points for strategic investors.

Cash-on-Cash Return

What Is Cash-on-Cash Return?

Cash-on-cash return (CoC) measures the annual cash flow an investor receives relative to the total cash invested. Unlike cap rates, cash-on-cash return accounts for leverage and provides a clearer picture of actual cash yield on invested capital.

How to Calculate Cash-on-Cash Return

The formula for cash-on-cash return is:

Cash-on-Cash Return = Annual Pre-Tax Cash Flow ÷ Total Cash Invested

For example, if you invest 3,000,000 as a down payment on a multifamily property and receive $240,000 in annual cash flow after debt service, your cash-on-cash return would be: CoC = 240,000÷3,000,000 = 0.08 or 8%

Components of the Cash-on-Cash Calculation

To accurately calculate cash-on-cash return, you need to understand:

Annual Pre-Tax Cash Flow is the NOI minus debt service (principal and interest payments). It represents the actual cash generated by the property that’s available for distribution to investors.

Total Cash Invested includes the down payment, closing costs, immediate repairs, and any other initial capital contributions.

When to Use Cash-on-Cash Return

Cash-on-cash return is particularly useful for:

1.Evaluating Current Income: It helps investors understand the annual yield on their invested capital.

2.Comparing Financing Structures: Different loan terms can significantly impact cash-on-cash returns.

3.Setting Investor Expectations: It provides a clear metric for communicating expected annual distributions.

4.Analyzing Short-Term Performance: For investors focused on immediate income rather than long-term appreciation.

Limitations of Cash-on-Cash Return

Cash-on-cash return has several limitations:

1.Ignores Appreciation: It doesn’t account for property value increases over time.

2.Excludes Tax Benefits: Depreciation and other tax advantages aren’t reflected in this metric.

3.Time Value of Money: It doesn’t consider when cash flows occur or their present value.

4.Variable Over Time: Cash-on-cash returns often change throughout the holding period as income grows and debt is paid down.

Target Cash-on-Cash Returns

At PrimeX Capital, we typically target initial cash-on-cash returns of 6-8% for our value-add multifamily investments, with projected increases to 8-10%+ as we implement our business plan. These targets provide attractive current income while we work to increase property value through strategic improvements.

Internal Rate of Return (IRR)

What Is IRR?

The Internal Rate of Return (IRR) is a more sophisticated metric that measures the annualized return on an investment, accounting for the time value of money. IRR considers all cash flows—both positive and negative—throughout the entire holding period, including the initial investment, ongoing cash flows, and the proceeds from sale.

How to Calculate IRR

IRR is the discount rate that makes the net present value (NPV) of all cash flows equal to zero. The formula is complex and typically requires financial software or spreadsheets:

0 = CF₀ + CF₁/(1+IRR)¹ + CF₂/(1+IRR)² + … + CFₙ/(1+IRR)ⁿ

Where:

•CF₀ is the initial investment (negative cash flow)

•CF₁, CF₂, etc. are the cash flows in periods 1, 2, etc.

•n is the total number of periods

For example, if you invest 3,000,000 in a multi-family property, receive annual cash flows of $240,000 for five years, and sell the property for a net profit of $4,500,000 in year 5, your IRR would be approximately 15.7%.

When to Use IRR

IRR is most valuable for:

1.Comparing Investments with Different Holding Periods: IRR normalizes returns across time frames.

2.Evaluating Total Return Potential: It accounts for both income and appreciation.

3.Sophisticated Investment Analysis: IRR is the industry standard for institutional investors and private equity firms.

4.Measuring Performance Against Hurdle Rates: Many investment funds set minimum IRR thresholds.

Limitations of IRR

Despite its sophistication, IRR has limitations:

1.Reinvestment Assumption: IRR assumes that interim cash flows can be reinvested at the same rate, which may not be realistic.

2.Multiple IRR Problem: Some investment patterns can produce multiple mathematically valid IRR solutions.

3.Scale Blindness: IRR doesn’t account for the absolute size of an investment.

4.Sensitivity to Timing: Small changes in the timing of cash flows can significantly impact IRR.

Target IRR Ranges

For value-add multifamily investments in 2025, PrimeX Capital targets project-level IRRs of 14-18% for our investors. These targets reflect the balance between risk and return in today’s market environment, accounting for current interest rates, supply-demand dynamics, and our specific value-add strategy.

Equity Multiple

What Is Equity Multiple?

The equity multiple is a straight forward metric that measures the total cash return an investor receives relative to their initial investment. It answers the simple question: “How many times will I get my money back?”

How to Calculate Equity Multiple

The formula for equity multiple is:

Equity Multiple = Total Cash Distributions ÷ Total Cash Invested

For example, if you invest 3,000,000 in a multi-family property and receive a total of $6,000,000 in distributions over the holding period (including cash flow and sale proceeds), your equity multiple would be: EM = 6,000,000÷3,000,000 = 2.0x

This means you received twice your initial investment back over the life of the investment.

When to Use Equity Multiple

Equity multiple is particularly useful for:

1.Communicating Total Return: It provides an intuitive measure of total return that’s easy for investors to understand.

2.Evaluating Absolute Return: It clearly shows how much wealth was created relative to the initial investment.

3.Comparing Similar-Length Investments: For investments with similar holding periods, equity multiple provides a clear comparison.

4.Setting Investor Expectations: It’s a tangible metric for explaining the expected outcome of an investment.

Limitations of Equity Multiple

Equity multiple has several limitations:

1.Ignores Time Value: It doesn’t account for when returns are received.

2.Holding Period Sensitivity: Longer holding periods naturally tend to produce higher equity multiples.

3.No Standardization: Unlike IRR, there’s no standard benchmark for what constitutes a “good” equity multiple.

4.Doesn’t Account for Risk: Two investments might have the same equity multiple but very different risk profiles.

Target Equity Multiples

At PrimeX Capital, we typically target equity multiples of 1.8x to 2.2x for our value-add multifamily investments over a 5-year holding period. These targets provide meaningful wealth creation for our investors while maintaining realistic expectations in today’s market environment.

How These Metrics Work Together

Each of these metrics provides a different perspective on investment performance, and they’re most powerful when used together:

Acquisition Analysis Example

Let’s analyze a potential multifamily acquisition using all four metrics:

Property Details:

•Purchase Price: $10,000,000

•Year 1 NOI: $500,000

•Down Payment: $3,000,000

•Annual Cash Flow (Year 1): $240,000

•Projected Sale Price (Year 5): $13,000,000

•Total Cash Distributions (5 years): $6,200,000

Metrics Analysis:

•Cap Rate: 5.0% (500,000÷10,000,000)

•Cash-on-Cash Return (Year 1): 8.0% (240,000÷3,000,000)

•IRR (5-year hold): 15.6%

•Equity Multiple (5-year hold): 2.07x (6,200,000÷3,000,000)

This comprehensive analysis shows that while the property’s unlevered return (cap rate) is modest at 5.0%, the use of leverage improves the cash-on-cash return to 8.0%. The projected IRR of 15.6% indicates strong risk-adjusted returns over the holding period, and the equity multiple of 2.07x demonstrates significant wealth creation potential.

Different Scenarios, Different Metrics

Different investment strategies may prioritize different metrics:

Income-Focused Strategy:

•Primary Metrics: Cap Rate and Cash-on-Cash Return

•Example Target: 5.5%+ Cap Rate, 8%+ Cash-on-Cash Return

Appreciation-Focused Strategy:

•Primary Metrics: IRR and Equity Multiple

•Example Target: 16%+ IRR, 2.0x+ Equity Multiple

Balanced Strategy:

•All metrics considered with minimum thresholds

•Example Target: 5.0%+ Cap Rate, 7%+ Cash-on-Cash Return, 14%+ IRR, 1.8x+ Equity Multiple

Advanced Considerations

Risk-Adjusted Returns

Sophisticated investors don’t just look at return metrics in isolation—they consider risk-adjusted returns. This involves analyzing:

1.Market Risk: Economic stability, employment diversity, population growth

2.Property Risk: Age, condition, tenant profile, location, location, location…

3.Execution Risk: Complexity of business plan, renovation scope, management challenges

4.Financial Risk: Leverage level, debt terms, interest rate exposure

A 14% IRR in a stable, low-risk investment might actually be more attractive than a 16% IRR in a high-risk scenario.

Sensitivity Analysis

Prudent investors conduct sensitivity analysis to understand how changes in key assumptions affect return metrics:

1.Exit Cap Rate Sensitivity: How do returns change if the exit cap rate is 0.5% higher than projected?

2.Rent Growth Sensitivity: What happens if rent growth is 1% lower than expected?

3.Expense Growth Sensitivity: How do increased expenses impact cash flow and returns?

4.Holding Period Sensitivity: How do returns change with a 3-year vs. 7-year hold?

The Impact of Leverage

Leverage (using debt financing) significantly impacts all return metrics except cap rate:

1.Higher Leverage: Increases potential cash-on-cash returns, IRR, and equity multiples, but also increases risk

2.Lower Leverage: Reduces potential returns but provides greater safety during market downturns

3.Optimal Leverage: Typically 65-75% loan-to-value for value-add multifamily, balancing return enhancement with risk management

Tax Considerations

Return metrics typically don’t account for tax benefits, which can significantly enhance actual investor returns:

1.Depreciation: Creates paper losses that can offset income

2.Cost Segregation: Accelerates depreciation for certain building components

3.1031 Exchanges: Defers capital gains taxes when reinvesting proceeds

4.Opportunity Zones: Provides tax incentives for investments in designated areas

Conclusion: Developing a Balanced Perspective

At PrimeX Capital, we believe that successful multifamily investing requires a comprehensive understanding of all these metrics and how they work together. No single metric tells the complete story, and overreliance on any one measure can lead to suboptimal investment decisions.

Our approach involves:

1.Setting Minimum Thresholds: Establishing baseline requirements for each metric based on current market conditions and investor expectations

2.Comparative Analysis: Evaluating potential investments against both market benchmarks and our existing portfolio

3.Scenario Planning: Modeling multiple outcomes to understand potential risks and returns

4.Regular Reassessment: Continuously monitoring actual performance against projections and adjusting strategies accordingly

By mastering these key metrics—cap rates, cash-on-cash returns, IRR, and equity multiples—investors can make more informed decisions, communicate more effectively with partners, and ultimately achieve superior risk-adjusted returns in multifamily real estate.

Ready to apply these metrics to your next multifamily investment? Contact PrimeX Capital today to learn more about our analytical approach and current opportunities. You can reach our investor relations team at [contact information] or visit our website at https://1primexcapital.com/ to learn more about our investment strategy and track record.

This article is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any securities. Investment in real estate involves risk, and past performance is not indicative of future results. Potential investors should conduct their own due diligence before making any investment decisions.