Buying a home is a big decision that has many financial and personal outcomes. Before you start, you will want to learn more about the mortgage process, including the real estate term, multiple on invested capital (MOIC).
If you’re new to to real estate investing, you might ask, what is MOIC in real estate? And how does it help you make decisions or affect your investment?
Here’s a quick guide to explain how this measurement works and what it is valuable to track.
What is a MOIC in Real Estate?
MOIC is a metric in real estate investing that determines your property’s return on investment or ROI. You calculate it by dividing the total cash inflow (that is, cash flow plus net profit from the sale) by the total amount you invested, including renovations and improvements.
Specifically, the equation is:
MOIC = (Total Cash Inflow) / (Total Amount Invested)
For example, if you invest $5,000 into a real estate fund and your return after 2 years is $10,000, then your MOIC is 2.0.
Of course, in some cases the math can get a little more complex. To illustrate this, imagine that you bought a $300K rental property for $30K down and did $10K in repairs and renovations. Then, you earned $20K in rental income from tenants over 2 years, after which you sold it for $60K profit. In this case, he MOIC would be:
MOIC = ($20K in rental income + $60K in profit) / ($30K to acquire house + $10K in renovations) = 2.0
This MOIC metric is useful because it provides you with insight into the profitability of a project. As a result, you can make informed decisions about whether or not it makes sense to pursue it.
As you would expect, a high MOIC indicates that you’re analyzing a profitable investment, while a low MOIC may signal the need for further analysis.
With this in mind, you can make smart investments, whether you decide to buy or sell your house in New York or trade a self storage facility in California.
What Factors Influence MOIC?
When you start shopping real estate, your goal should be to identify profitable investments that you can operate profitably, and eventually, exit for a windfall. With this goal in mind, here are a few factors you may want to keep in mind that could affect the MOIC of your investment:
Performance
The way your investment performs is one of the primary factors that affects its MOIC. You want to make sure you produce strong cash flow while you own an asset and that you sell if for a hefty profit. This way, you can ensure a higher MOIC.
Time Horizon
Understandably, a longer investment means you will usually produce a higher MOIC. This happens because it provides more time for your asset it grow in value.
However, it’s important to note that MOIC doesn’t account for the time value of money, so you also need to also use other metrics like IRR or ARR (that incorporate the length of an investment) to assess how much you’re making on a year-over-year basis.
Exit Strategy
How you exit your investment can determine what happens to your MOIC. In particular, you will earn a higher MOIC if you sell in a good economic cycle.
In residential real estate, periods when interest rates are low will drives asset prices up, making this periods a good time to sell assets for a profit. In commercial real estate, both low interest rates and low cap rates can drive asset prices up, making them favorable times to sell.
How Cap Rate Compares to MOIC
Before making a real estate investment, you want to use different metrics to check valuation. Aside from MOIC, the cap rate is another important metric.
It refers to a measurement that looks into a property’s net operating income and sees how it lines up with the price. It doesn’t consider leverage, making it an effective tool if you want to compare deals with varying financing terms.
On the other hand, a MOIC evaluates how much you can profit from a real estate investment.
So, while the cap rate provides a quick estimate of a property’s value, the MOIC offers an in-depth analysis of its profitability.
Answering the Question, What is MOIC?
Whether you want to move or invest in investment properties, you should aim to earn a good return on your investment. MOIC and other similar metrics are smart ways to determine profitability.
So, when shopping real estate you might want to buy, consider estimating, what is MOIC I could earn if this project goes as I expect? This way, the odds will be stacked in your favor.
Ready to learn more? Explore the real estate section of this site.