IRR vs MOIC vs Equity Multiple: How to Read Real Estate Returns Without Being Fooled

Private real estate is sold on returns. Returns are reported in at least five different metrics, each of which says something subtly different about the same cash flows. A first-time LP can be forgiven for confusing them. A serious LP cannot.

This piece walks through every metric you will see on a private real estate term sheet, shows what each one actually measures, and works through three deal examples that illustrate how the same underlying business plan can be made to look very different depending on which number the GP chooses to lead with.

The five metrics, defined precisely

Every return number on a real estate fund pitch deck is one of the following. Memorize the definitions; they matter.

• IRR (Internal Rate of Return) — the annualized discount rate that makes the net present value of all cash flows equal to zero. Time-sensitive. Sensitive to the timing of capital returns, not just their magnitude.
• MOIC / Equity Multiple — total distributions divided by total contributions. Time-insensitive. Two deals with identical MOICs can have wildly different IRRs depending on hold length.
• DPI (Distributions to Paid-In) — cumulative cash actually distributed, divided by cumulative capital actually called. Realized only. Does not include unrealized NAV.
• TVPI (Total Value to Paid-In) — DPI plus current unrealized NAV, divided by paid-in capital. Paper plus realized.
• Cash-on-cash yield — annual cash distribution divided by invested equity. A snapshot metric, useful for current-yield comparisons.

And one critical qualifier that applies to all of them: gross vs net. Gross numbers are before management fees, fund expenses, and GP carry. Net numbers are after. The spread between gross and net for a 2-and-20 fund with an 8 percent hurdle is typically 400 to 700 basis points of IRR. Always read net.

Three deals, same MOIC, very different IRRs

The clearest way to feel the difference between IRR and MOIC is to look at three deals that produce exactly 2.0x of equity multiple over different hold periods.

All three deals produce the same absolute wealth — $1M of profit on $1M of equity. The IRRs span 34 percentage points. A GP marketing Deal A on its 41 percent IRR can technically claim 'top-decile returns' while having generated the same dollar profit as a sleepy core-plus deal.

Which deal is best depends on what the LP is doing with the capital next. If Deal A's capital can be productively recycled into another 41 percent IRR opportunity immediately, then yes — Deal A is genuinely better. If the recycled capital sits in T-bills for three years before the next opportunity surfaces, the blended return on the original $1M for the full five-year period is roughly equivalent to Deal B.

This is why institutional LPs increasingly emphasize realized MOIC alongside IRR. MOIC measures wealth created; IRR measures the rate at which wealth was created. Both matter; neither alone is sufficient.

The classic IRR-flattering refinance trick

The most common way to dress up an IRR without creating additional wealth is to refinance aggressively in year one and return a large share of LP capital before the underlying business plan executes.

Consider a $10M acquisition with $4M of LP equity. The sponsor closes the deal, executes a six-month interest-only refinance that pulls out $3M of additional debt proceeds, and distributes $2.8M of that to the LPs (keeping $0.2M for reserves). The asset is then sold three years later for $11M, with the LP receiving a final $3.2M distribution net of debt repayment.

The IRR on this cash flow stream is approximately 28 percent — top-decile by marketing-deck standards. The MOIC is 1.5x — sub-benchmark for value-add. The sponsor will lead with the IRR. The sophisticated LP reads the MOIC first and asks how much of the IRR was generated by genuine value creation versus by capital-recycling timing.

There is nothing wrong with an early refinance distribution per se — returning capital quickly is good for LPs. The problem arises when the GP uses the inflated IRR to market the next fund and the LP does not adjust for the fact that the absolute wealth created was modest.

DPI vs TVPI: cash in hand vs the GP's opinion

TVPI = DPI + RVPI, where RVPI (Residual Value to Paid-In) is the unrealized NAV the GP currently marks on the remaining portfolio. In a young fund, TVPI is mostly RVPI. In a fund approaching termination, TVPI should converge to DPI as assets are sold and unrealized marks become realized cash.

A fund reporting 1.8x TVPI with 0.3x DPI five years in is showing you a lot of GP opinion and very little market validation. A fund reporting 1.8x TVPI with 1.5x DPI is showing you the same headline number backed by real exits.

Institutional LPs increasingly weight DPI heavily when underwriting follow-on funds. A GP whose Fund III sits at 2.1x TVPI but has only realized 0.6x DPI eight years in has a credibility problem even if every unrealized mark is honest.

What the LP should ask

Five questions that separate marketing IRRs from underwritable ones:

• Is this IRR gross or net? If net, net of what fees and what hurdle?
• What is the MOIC at this IRR? Can you show me the underlying cash flow schedule?
• How much of the IRR is generated by an early-year refinance distribution versus by terminal sale?
• What is your realized DPI on prior funds at the same point in the lifecycle?
• What discount rate does your fund use to mark unrealized assets, and when was that last benchmarked?

A GP who can answer these without referring back to a marketing team is a GP worth taking seriously. A GP who refers you to 'the deck' is a GP whose deck deserves more skepticism than the audience usually gives it.

Frequently asked questions