Welcome to our first post in the Cap Rates & Coffee series. In this blog, we want to regularly provide you with bite-sized pieces of technical real estate knowledge. Today we start with some old acquaintances…
In the world of commercial real estate investing, there’s no single metric that fits all. Depending on the investor’s strategy and risk appetite, different key performance indicators (KPIs) come into focus. Two of the most widely used – but often misunderstood – are leveraged Internal Rate of Return (LIRR) and Cash-on-Cash (CoC).
In this post, we’d like to explore why short-term, opportunistic investors like private equity funds typically prioritize LIRR, while long-term, conservative investors focused on core or core-plus strategies tend to emphasize Cash-on-Cash.
What is Leveraged IRR (LIRR) – and why do PE investors love it?
Leveraged IRR measures the annualized return on equity, taking into account both the time value of money and the impact of debt (leverage) on the investment. It includes all cash flows—both in and out—over the life of the investment.
Private equity investors are typically looking for short- to medium-term upside. Their goal is to create value quickly, whether through lease-up, repositioning, development, or recapitalization. In this context, leveraged IRR becomes the go-to metric because:
- It captures the timing of cash flows, which is crucial for fast exits.
- It reflects the amplifying effect of leverage—which can boost returns if the investment performs well.
- It supports comparability between deals of different durations and structures.
In essence, leveraged IRR tells private equity firms how efficiently their capital is working, and how profitable a project is likely to be within a finite time horizon—often 3 to 7 years.
Why conservative investors prefer Cash-on-Cash (CoC) return
In contrast, core and core-plus investors—such as pension funds, insurance companies, or family offices—tend to pursue stable, long-term income from well-located, low-risk properties. For them, the focus shifts from exit timing and value creation to steady cash flow and capital preservation.
This is where Cash-on-Cash Return becomes more relevant. CoC measures the actual cash income an investor receives relative to the equity invested—typically on an annual basis.
Why does this metric matter more to conservative investors?
- It reflects real, realized returns, not just paper profits.
- It’s easy to interpret as a yearly yield, similar to a bond.
- It helps investors understand the income-generating potential of an asset without assumptions about future sales or refinancing.
Put simply: conservative investors want to know how much cash they’ll actually get each year on their equity. CoC gives them exactly that.
Two metrics, two mindsets
There’s no right or wrong metric – just the right one for the strategy. At Corecap, our mission is to make these nuances easy to understand and even easier to analyze. Our platform provides full transparency into all relevant KPIs—so whether you’re underwriting a short-term repositioning deal or a long-term stabilized asset, you have the right tool to make data-driven decisions.
What’s next?
In future posts, we’ll dive deeper into other real estate KPIs – like equity multiples, debt service coverage ratios, and more.
And as always, we’d love to hear from you. Which metrics do you prioritize in your own investments – and why? Drop us a message anytime or reach out through our contact form.
Thanks for reading and see you soon.
– The Corecap Team