Investing in multifamily real estate can be a great way to diversify your portfolio and achieve long-term financial growth. However, understanding the key metrics that drive returns is crucial for making informed decisions. Let’s break down some of the top metrics you need to know, especially when investing in development projects.

Metric 1: Annualized Average Return (AAR)

• What It Is: AAR measures the average yearly return on your investment, accounting for the time value of money. Unlike a simple ROI, which looks only at total return, AAR factors in the duration of the investment, making it a better indicator of annual performance.
• Why It Matters: AAR is particularly useful in evaluating development projects like those offered by AMT Development. For instance, the projected AAR for our current project at 1322 9th St NW is 23%, reflecting strong annual growth potential over a 2-2.5 year hold period. This metric helps you compare different investments on an equal footing, especially when the timelines vary.

Metric 2: Equity Multiple

• What It Is: The equity multiple shows the total return on investment expressed as a multiple of the initial capital. For example, an equity multiple of 1.52x means that for every $1 invested, the total return would be $1.52.
• Why It Matters: This metric provides a clear picture of the overall profitability of a project, irrespective of its duration. It’s a useful measure for investors seeking projects with strong upside potential, especially in development where significant value is created as the property moves from construction to completion.

Metric 3: Preferred Return

• What It Is: The preferred return, often referred to as “pref,” is a percentage of annual return that is prioritized to investors before any profit split with the sponsor. For example, AMT Development offers a preferred return of 14% on Class B shares, meaning investors receive this return before any additional profits are shared.
• Why It Matters: This metric acts as a safeguard, ensuring investors receive a minimum return before the sponsor benefits. It’s particularly attractive in development projects, where the timeline for cash flow can be delayed until stabilization is achieved.

Metric 4: Internal Rate of Return (IRR)

• What It Is: IRR is a comprehensive metric that considers both the timing and size of cash flows. It calculates the rate of return that makes the net present value (NPV) of all cash flows from the investment equal to zero.
• Why It Matters: IRR is a critical metric for comparing investments, especially in development where cash flows may be back-loaded. A higher IRR can indicate a more efficient use of capital, making it a favored metric for many passive investors.

Metric 5: Cash-on-Cash Return

• What It Is: This metric measures the annual cash flow as a percentage of the total equity invested. For development projects, this metric may be lower or even non-existent during the construction phase, but it often increases significantly once the project is completed and stabilized.
• Why It Matters: Cash-on-cash return is important for investors who prioritize regular cash flow. While development projects may not offer immediate cash flow, the equity upside and increased cash returns post-stabilization can make these projects highly rewarding.

Understanding these key metrics is essential for evaluating real estate investments, especially in development projects where the potential for high returns comes with unique risks and timelines. At AMT Development, we focus on projects that offer strong AAR, attractive equity multiples, and substantial value creation. By educating yourself on these metrics, you can make more informed investment decisions and better capitalize on the opportunities in the multifamily real estate market.

Want to learn more about the returns you can expect from our latest multifamily development projects? Contact us today for a detailed analysis and current investment opportunities tailored to your financial goals.