Passive Real Estate Investing can be a great way to diversify your investment portfolio. With passive real estate investing, you can have the pride of ownership that comes with having a stake in a tangible property that you can see and if nearby, you can visit. Passive real estate investing provides various investment models that enable you to align investment opportunities with your individual goals. When you work with the right partner or partners, it’s possible to achieve outsized returns. Different real estate projects generate profits and cash along different timelines, so you can select the investment opportunities that meet your cash flow and tax needs.
With these advantages, it's no wonder that you’re here to learn about passive real estate investing KPIs, and we’re here to help! (CTA - feel free to reach out here with any questions you may have).
We divide passive real estate investing KPIs into two broad categories. The first are KPIs that help you to know if an investment opportunity is right for you. By understanding these KPIs you can start to narrow down the opportunities that best meet your needs. These KPIs are useful for evaluating deals on the front end.
The second set of passive real estate investing KPIs helps you to keep tabs on how your investment or investments are performing over the life of the investment.
We’re going to deal with the first set of KPIs in this article, helping to discern which investment opportunities might be right for you.
Our first passive real estate investing KPI that we like to introduce to new investors is the Multiple, or Multiple on Invested, or Capital MOIC (sometimes also Net Multiple).
MOIC helps you to compare the value that will be realized in an investment over the initial investment cost, so the formula for MOIC is:
In other words, MOIC is the total dollars expected to be paid out by an investment relative to the dollars invested.
At the very beginning of a real estate project, you estimate the total Unrealized Value and over time you can break out the Realized and Unrealized value as actual conditions change to compare the investment’s progress against initial expectations.
So if a real estate project is expected to pay out $2.3M in proceeds and the total investment in the project is $1.0M, the MOIC, or ‘multiple’ is 2.3x.
Net MOIC is the multiple achieved after all expected fees and expenses that will be borne during the project are factored in.
Using MOIC to evaluate investment opportunities upfront helps you to compare various opportunities against each other. MOIC calculations can be updated as projects progress to see how an investment is performing against initial assumptions.
There are similar passive real estate investing KPIs that are based upon multiples like MOIC is. They are TVPI (Total Value of Paid-in Capital), RVPI (Residual Value to Paid-in), and DPI (Distributed to Paid-in Capital). As you move from MOIC as a KPI to TVPI, RVPI, and DPI, you’re starting to move into accounting for the value of an investment as it evolves over a timeline.
TVPI (Total Value of Paid-in Capital) is a similar KPI to MOIC in that both represent a gross value of a real estate investment. Where MOIC divides the total expected value by the initial investment, the TVPI divides the total value of the investment by the amount paid in. Real estate projects absorb cash and distribute cash at different rates. For instance, buying a commercial real estate property is largely a lump sum transaction, although there may be some additional cash requirements for things like property upgrades. Conversely, a development project building a neighborhood of homes typically has an extended timeline of cash needs. As cash is absorbed in a project then the TVPI and MOIC will ultimately converge.
Once an investment is underway, you can break down the TVPI into two other metrics.
RVPI (Residual Value to Paid-in Capital) provides a measure of remaining risk to opportunity in an ongoing project. RVPI represents the residual or unrealized value of a fund’s assets relative to what investors have contributed to date. To determine RVPI, you ascertain the current value of all assets held in a project and divide it by the total of all of the capital contributed to that date. It’s a shortcut to determining if a project is still ‘above water.’
While RVPI is a measure of the prospective value of a project vs the capital invested to date, DPI (Distributed to Paid-in Capital) is a measure of the multiple of the amount already distributed back to investors over the amount they’ve paid thus far.
These metrics are handy to do an initial snapshot assessment of an investment under consideration and to evaluate the performance of an investment over its life.
While these KPIs are widely used, a drawback to them is that they don’t take into account the time value of money. For example, receiving $2 for every dollar you invested tomorrow is significantly better than receiving that same $2 in 5 years. Therefore, it is important to also evaluate potential, and ongoing, real estate investments using metrics that factor in the time value of money.
In our next article, Passive Real Estate Investing KPIs: How is My Investment Doing? we take a look at passive real estate investing KPIs that take into account the time value of money.
All investments involve the risk of potential investment losses as well as the potential for investment gains. Prior performance is no guarantee of future results, and there can be no assurance, and clients should not assume, that future performance will be comparable to past performance. Metrics updated as of June 30, 2023. JLAM does not provide tax, legal, investment, or accounting advice. This website has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, investment, or accounting advice. You should consult your own tax, legal, investment, and accounting advisors before engaging in any transaction. Any third-party information contained herein is from sources believed to be reliable, but which we have not independently verified.