Introduction:
If an investor is going to take the risk of allocating money to a commercial real estate investment, certainly one of the major questions on their mind is how much of a return they stand to earn on their investment.
There are many ways to measure this, but one of the most common, and widely accepted in the private equity industry, is known as Multiple on Invested Capital (MOIC) for short.
Let’s look at how MOIC is calculated and why it’s important in commercial real estate investing.
Key Takeaways:
- MOIC is a metric used in the private equity industry to analyze commercial real estate investments and communicate results to limited partners.
- It compares the amount of cash used for the initial investment with the amount of cash received over the holding period.
- MOIC is calculated by dividing total cash inflows by total cash outflows.
How it Works:
The calculation for MOIC is relatively straightforward using a simple equation:
MOIC = total cash inflows / total cash outflows
This metric helps investors understand the overall cash flow associated with a particular investment property or fund. It’s used to compare the return on investment with the initial cash investment.
For example, if a commercial property is purchased for $30 million and generates $2 million in annual cash flow for a 10-year holding period, with a final sale price of $50 million, the total cash inflow would be $70 million. The MOIC would be calculated as $70 million divided by the initial cash investment of $30 million, resulting in a MOIC of 2.33.
Key Components:
- Cash Inflows: The cash inflows include the total amount of cash received throughout the investment holding period, including rental income and the sale price of the property.
- Cash Outflows: The cash outflows represent the initial cash investment into the property or fund.
Benefits:
- Simple and Easy Calculation: MOIC is a straightforward metric that can be easily calculated by dividing total cash inflows by total cash outflows.
- Comparison of Investments: MOIC allows for the easy comparison of different investments by considering the return on investment relative to the initial cash investment.
- Communication with Limited Partners: MOIC is commonly used in the private equity industry to communicate investment performance to limited partners.
Takeaway:
Multiple on Invested Capital (MOIC) is a metric used in private equity investing to help investors understand the cash distributions and equity value of their investment compared to the amount of cash initially invested into the fund or deal. It’s a simple and easy-to-calculate metric that provides valuable insights into the return on investment.
However, it should be used in conjunction with other metrics, such as the internal rate of return, to provide a more comprehensive analysis of investment performance. When evaluating commercial real estate investments, considering MOIC can help investors make informed decisions and assess the potential returns.
By understanding MOIC and its significance in commercial real estate investing, investors who conduct thorough due diligence can make more informed decisions and monitor the performance of their investments effectively.
Disclaimer: The information on this website, including glossary definitions, is for educational and informational purposes only and not intended as professional advice. While we strive for accuracy, we make no guarantees regarding the completeness, reliability, or timeliness of the information provided. We are not liable for any loss or damage arising from your use of the site. Investment decisions in commercial real estate should be made based on individual due diligence and professional advice. Laws and regulations are subject to change; always consult legal and financial experts before making decisions.
