IRR vs. MOIC Explained for Private Real Estate Investors
By Sierra Davis, Principal & Fund Manager, Essential Income Fund IPublished Last reviewed
Short answer
MOIC (multiple on invested capital) is the total cash an investment returns divided by the cash put in; it shows how much money grows but ignores how long it takes. IRR (internal rate of return) is the annualized rate that accounts for the timing of every cash flow, so it rewards money returned sooner. Comparing private real estate investments well requires both numbers, plus an understanding of whether they are contractual or projected.
Every private real estate pitch deck has two numbers near the top, a multiple and an IRR. They sound precise. They're often the least reliable thing on the page.
The first thing I want to know about any deal is how my money comes back, and when. IRR and MOIC are useful once you know what each one measures and, just as important, where the numbers came from.
MOIC is how much your money grows
MOIC is simple, and that's its weakness. It has no clock. A 1.5x in three years and a 1.5x in ten years show up as the same number, even though one is far better than the other.
IRR is how fast your money grows
Because IRR cares about timing, it rewards early cash. A dollar returned in year one counts for more than a dollar returned in year seven, because you can use it sooner. Two deals with the same MOIC can have very different IRRs.
Cash-on-cash yield is what lands in your account each year
For income investors, this is often the number that matters most day to day. It tells you what you can actually spend this year, not what a spreadsheet says you might have at the end.
Why MOIC without time is misleading
| Investment | MOIC | Time | Cash during the hold | Approximate IRR |
|---|---|---|---|---|
| Hypothetical equity deal A | 2.0x | 7 years | None; all cash at the end | About 10.4% |
| Hypothetical equity deal B | 1.6x | 5 years | None; all cash at the end | About 9.9% |
| $100,000 certificate at 10.50%, 60 months | 1.525x | 5 years | $875 a month | 10.50% nominal; about 11.02% effective if reinvested |
Deal A has the biggest multiple, but you wait seven years for all of it. Spread over that time, a 2.0x works out to roughly 10.4% a year. Deal B's 1.6x in five years is about 9.9% a year. The bigger multiple isn't automatically the better deal, and the smaller multiple isn't automatically worse.
How projections get engineered
An equity deal's IRR and MOIC are projections. They depend on things that haven't happened yet, and small changes in assumptions move them a lot:
- Refinance assumptions. Many models assume a cash-out refinance in year two or three that returns a big chunk of capital early. Because IRR rewards early cash, that one assumption can lift the projected IRR sharply. If rates are higher or values lower when the time comes, the refinance may be smaller, later, or not happen.
- Exit cap rate. The sale price at the end is usually estimated by dividing projected income by an assumed cap rate. Assume a slightly lower exit cap rate and the projected sale price, MOIC, and IRR all rise.
- Rent growth and expenses. A few points of extra rent growth each year, or optimistic expense estimates, compound over a long hold.
- Hold period. Shortening the assumed hold can raise IRR even when the MOIC barely changes.
None of this means a sponsor is being dishonest. It means a projected IRR is an opinion about the future. Ask to see the assumptions, and ask what happens to the numbers if the refinance doesn't happen or the exit cap rate is one point higher.
Why a contractual monthly coupon makes the math transparent
With a loan or a fixed-rate debt investment, the cash flows are written into a contract (a stated rate, a payment date, and a maturity date). The IRR and MOIC aren't a forecast of what a building might sell for. They're arithmetic on the contract.
A projection rests on what a market might do later. A loan rests on what the contract says today. That doesn't make contractual cash flows certain. A borrower can stop paying, and recovering capital from collateral takes time and money. But you can see exactly what you're being promised, and the question becomes whether the promise will be kept, not whether the assumptions were realistic.
A worked example at $100,000 for 60 months
| Measure | Result |
|---|---|
| Monthly interest | $875 |
| Total interest over 60 months | $52,500 |
| Total cash back (interest plus principal at maturity) | $152,500 |
| MOIC | 1.525x ($152,500 ÷ $100,000) |
| Annual cash-on-cash yield | 10.50% |
| Nominal annual rate (IRR of the cash flows) | 10.50% |
| Effective annual rate if each payment is reinvested at the same rate | About 11.02% |
Here's the part that confuses people. The rate is 10.50% a year, paid monthly. If you spend each $875 payment, your return is 10.50% a year, period. If you could reinvest each payment at the same rate, the monthly compounding would grow your money at an effective rate of about 11.02% a year. The extra comes from getting paid monthly instead of once a year, not from a higher rate.
| Stated rate | Effective annual rate if reinvested |
|---|---|
| 8.00% | About 8.30% |
| 8.75% | About 9.11% |
| 9.50% | About 9.92% |
| 10.50% | About 11.02% |
What neither number tells you
- Risk. A 10% IRR from a performing first-lien loan and a 10% projected IRR from a value-add equity deal are not the same bet. The number tells you the payoff, not the odds.
- Position in the capital stack. Where am I sitting in this deal? A lender is paid before the owner; an equity investor is paid last. See real estate debt vs. syndication.
- How protected the principal is. For debt, look at loan-to-value, which is how much equity stands between the loan and a loss.
- Liquidity. Neither metric tells you whether you can get out early. Most private investments, debt and equity alike, are illiquid.
- Taxes. Interest income, depreciation, and capital gains are taxed differently. Compare after-tax results with your tax advisor.
Frequently asked questions
What is the difference between IRR and MOIC?
MOIC measures how many times your money is returned in total, while IRR measures the annual rate of return, accounting for when each dollar comes back. MOIC answers "how much," IRR answers "how fast," and you need both to compare investments with different hold periods.
Is a higher MOIC always better?
No. A higher MOIC earned over a much longer period can produce a lower annual return. For example, a hypothetical 2.0x over 7 years is roughly a 10.4% IRR, about the same annual pace as a 1.6x over 5 years at roughly 9.9%.
Why are projected IRRs in real estate syndications uncertain?
Projected IRRs depend on assumptions about future rents, expenses, refinancing, and the sale price at exit. Changing the assumed refinance timing or exit cap rate even slightly can move the projected IRR significantly, and actual results can differ from projections.
Why does monthly interest produce a higher effective rate?
Monthly payments can be reinvested sooner, so if each payment earned the same rate, the money would compound. A 10.50% rate paid monthly compounds to an effective annual rate of about 11.02% if every payment is reinvested at 10.50%; if payments are spent, the return is the 10.50% stated rate.
What is cash-on-cash yield?
Cash-on-cash yield is the cash an investment pays you in a year divided by the cash you invested. It shows current income, not total return, so it doesn't capture gains or losses at the end of the investment.
This article is for educational purposes only and is not investment, legal, or tax advice. It describes general characteristics of real estate debt investments; individual investments differ, and all involve risk, including the possible loss of principal. Essential Investment Group, LLC is not a registered investment advisor, broker-dealer, or bank. Any offer of securities in Essential Income Fund I, LLC is made only through its Private Placement Memorandum to verified accredited investors under Rule 506(c) of Regulation D.