Summary
Highlights
Anna starts off the Q&A session. One of the questions include what metrics should one focus on (ROI or ROE)? ROE because ROI doesn't take time into the account. Jay continues to answer question before the end of the presentation.
Jay covers the good, the bad, and the ugly of internal rate of return. It is literally the best tool to compare investments. The bad thing is irr is typically going to be a theorectical maximum return. The ugly is by returning payments sooner, it raises the IRR, creating an obfuscation.
Anna Myers introduces Jay Scott, who will be discussing multi-family return metrics. The presentation is being recorded, and a replay with a PDF of the slides will be available. Questions can be submitted via the Q&A.
Jay Scott introduces himself, mentioning his background, his investments in multi-family properties, and his books, including his latest book, "Real Estate by the Numbers." The presentation covers a section from that book.
Jay discusses the standard return metrics that multi-family syndicators provide to passive investors, including equity multiple, preferred return, average cash on cash return, average annual return, and internal rate of return (IRR). He will elaborate on each metric's meaning, benefits, and drawbacks.
Jay explains equity multiple, defining it as how much an investment will multiply over the hold period. He details how to calculate it and discusses the good (simplicity), the bad (not percentage-based), and the ugly (potential for distortion due to unspecified hold periods).
Jay defines average cash on cash return as the percentage an investment will return per year on average from property operations. He distinguishes it from returns from equity events like sales or refinances. He highlights the potential for operators to manipulate this metric through over-raising.
Syndication A raises 10 million vs Syndication B raises 11 million. The extra amount that Syndication B received is used to improve the cash on cash returns, but the good is that the investors investing for cash flow are going to see higher cash flow than they would if the operator didn't raise extra money. The bad is every hundred thousand dollar investment is only worth approximately 9% of the equity and not 100%.
Jay explains preferred return, defining it as the percentage of an investment returned per year before operators receive any profit. He discusses how shortfalls in preferred returns can be handled, with some operators rolling them over to subsequent years while others do not. He emphasizes the importance of aligning incentives between operators and investors.
Anna introduces a new value-add fund and the spectacular average annual return of the last four exits. She explains their proven data science strategy, and that due to housing prices dropping, it's creating a perfect opportunity to swoop in and pick up assets at a discount. She later moves on to discuss Monarch Villas, located in Sandy Springs near Atlanta Metro.
Jay defines average annual return, explaining that it takes into account both operations and equity events. He provides the formula for calculating AAR and discusses its limitations. He explains that you're unlikley to see the exact return in any given year, but it's useful to know how much money is being received in any given year.
Jay defines IRR as the compounded return on an overall investment and then provides an explanation of simple vs compound interest, what it is, and the difference between them. He provides different scenarios where IRR will change, despite having the same amount invested.