Understanding the Numbers on a Real Estate Token Investment Website for New Investors

Tokenization will cause the commercial real estate market to attract a new crop of investors and this comes with some responsibilities for the investors.

They have to understand the assets that the tokens backs including the risks and the expected return or benefits of buying and holding the tokens for example commercial real estate investment falls under 3 investment categories it could be core investment, value add and opportunistic  these categories  differ based on the risk and return they provide investors.

• Core are less risky and offers stable income and no appreciation in value of the property. they are like building in highly desirable location that are fully leased
• Value add offers have upside potential. Though they might have cashflow in place there is a possibility to increase the cash flow by making improvement to the property.  Therefore, they offer a higher level of return when compared with core investment. however, Investors bear some level of risk because the business plan to increase the cash flow might not turn out as expected.
• Opportunistic investments are like properties that need significant rehabilitation to realize their potential or they maybe raw land on which a property is to be built from ground up. It offers highest level of return if the business plan is successful and of course bears more risk.

An investment opportunity is only as good as the extent to which it matches the risk tolerance and investments objective of the investors. Therefore  token buyers  need to understand how your offerings helps them meet their goal. one step towards this is getting to understand what the numbers your find on a tokenized real estate investment platform mean.

For example:

Terms associated with real estate token investing

When you hop on a tokenized real estate investment platform for example redswan , RealtT, marketspace capital etc and you are looking through the different offerings. You will come across different investment lingos like (internal rate of return yields or IRR, cash on cash yields, equity multiple) etc and beside them numbers usually expressed  in percentages.

Gut what do these words mean and what do the numbers represent and how are they supposed to help you.

They are simply metrics that investors used to understand the returns of a deal.

They serve two major purpose when it come to real estate investing; number  one is  how good a property is at producing rental income number two is how much it could appreciate in value.

IRR

IRR tells you the annualized growth rate of the capital you have invested over a business plan it tells you how much the money you have invested  will grow by throughout the investment period.

It is the annual rate of growth that an investment is meant generate It includes all projected cash flow to be generated by the property over the life time of the deal.

Typically used to compare investment options that fall under the same category. The higher the IRR the more desirable the investment.  an investment with an IRR of 10% means that the investment will produce 10% return over the holding period.

Cap rate

Tells you how good a property is at producing income.

It simply Measures the ability to produce income and is calculated by dividing the net operating income (NOI) by the total cost of the property.

Net Operating Income Is calculated by subtracting all operating expenses incurred on a property from all revenue generated.

For example, if a property owner collects monthly rent on the property the NOI calculation could go thus;

ANNUAL GROSS RENT – OPERATING EXPENSES [management fees, taxes, insurance, maintenance

CAP RATE = (net operating income / TOTAL PURCHASE PRICE)

E.G NOI = 10,000 and total purchase price = 100,000

Cap rate = 10,000/100,000 = 10%

Cash on cash return or average cash yield

It shows how much you are getting back in one year based on the cash you invest on a property

it is calculated by dividing the cashflow of the property by the initial investment on the property

Cash flow = (all your rents – expenses)

Initial investment = (all the cash required to purchase a property like down payment, closing cost, renovations/expenses)

A good cash on cash return is at least 10%. some people may ignore it if they feel the property will appreciate in value and they are holding it for that reason rather than the income it generates

Equity multiple

Tells how much you will make relative to how much you have put in i.e. the amount by which your equity will be multiplied e.g. if a property has equity multiple of 3x over a 5 years hold time you will expect your capital to triple within that time period.

It takes into account the cash inflow as well as return when the asset is sold Over the course of the projected hold time:

Equity multiplier = Total Cash Distribution / Total equity Invested

An equity multiplier that is less than 1.0 indicates that you are receiving a return less than you invested. greater than 1.0 means you are receiving more cash than you invested.

Sponsor equity raise

This term explains that the sponsor is trying or willing to exchange funds for equity in their property e.g if on a real estate investment site it says sponsors equity raise $10 million this  simply means that the sponsor in trying to raise $10 million in exchange for equity.