One question that often comes up is which metric is more meaningful when measuring total return – Internal Rate of Return (IRR) or Equity Multiple (EM)?
The short answer is: both matter. But each tells a different part of the story.
Equity Multiple (EM) is a straightforward measure: how much total cash you received relative to what you invested. For example, if you invested $100,000 and received $200,000 over the life of the investment, your EM is 2.0x. It is a clean way to evaluate total return, especially when comparing across deals.
Internal Rate of Return (IRR), however, incorporates the timing of cash flows. Receiving distributions sooner boosts IRR because it accounts for the time value of money. That said, a higher IRR does not always mean a stronger deal. In fact, during periods of cap rate compression (remember the hey days of 2016-2021?), IRRs may look inflated – even when the risk profile has gone up.
So, which one should you rely on?
It depends on your investment goals:
- Shorter-term or medium-term holds → IRR may be more relevant.
- Longer-term, stable holds → EM (and cash-on-cash returns) may provide a clearer picture.
One final thought: the output is only as good as the input. Overly optimistic assumptions can easily distort both metrics.
If I had to pick one? I’d ask first – what is the investment horizon and what is your risk tolerance?
Vessi Kapoulian,
Creating educated and empowered investors, one live/newsletter/deal at a time