IRR vs MOIC vs Cash-on-Cash: How to Actually Read a Sponsor's Return Projections
Every private real estate offering deck leads with return projections. The metrics sponsors choose. And the ones they omit. Tell you as much about the deal as the numbers themselves.
Why Three Metrics Exist
IRR, MOIC, and cash-on-cash return are not interchangeable. Each answers a different question about the same investment, and each has a blind spot the others correct for. A sponsor who shows you all three is giving you the full picture. A sponsor who shows you only one is usually showing you the one that flatters their deal.
The core tension is this: time matters to some investors and not to others. A pension fund with a 30-year liability horizon evaluates capital differently than a family office running a concentrated portfolio of five deals. Understanding which metric maps to your situation is the first step in reading any deal summary.
IRR: What annualized return did I earn, accounting for the timing of every cash flow?
MOIC: For every dollar I put in, how many dollars did I get back in total?
Cash-on-Cash: What percentage of my invested capital did I receive in distributions each year?
IRR: What It Measures and What It Hides
The Internal Rate of Return is the discount rate at which the net present value of all cash flows. Both in and out. Equals zero. In plain terms, it is the annualized return that accounts for when you received your money, not just how much you received.
A deal that returns 2.0x over 3 years has a materially higher IRR than the same 2.0x return over 7 years, because you had the use of capital for fewer years. This time-weighting is IRR's primary strength. It allows you to compare a 3-year light-value-add to a 10-year ground-up development on an apples-to-apples basis.
What IRR hides
The most significant manipulation pattern involves early distributions inflating IRR. Because IRR is highly sensitive to early cash flows, a sponsor who structures a deal to return capital quickly. Via construction loan proceeds, bridge financing, or aggressive refinancing in year two. Can show a 22% IRR on a deal that ultimately returns 1.6x. The early return of principal creates a front-loaded cash flow that drives the IRR number without delivering meaningful wealth creation.
IRR also assumes that interim distributions are reinvested at the same rate. The so-called reinvestment rate assumption. In practice, an LP who receives a $40,000 distribution in year two is unlikely to redeploy it immediately at 18% IRR. The actual realized return will trail the modeled IRR unless the LP has a continuous deal pipeline at equivalent returns.
Finally, IRR says nothing about the absolute size of a return. A 25% IRR on a $100,000 investment is not comparable to a 17% IRR on a $5,000,000 investment in terms of wealth generated.
MOIC: The Equity Multiple
The Multiple on Invested Capital (also called the Equity Multiple or EM) answers the simplest possible question: how many dollars did I get back for every dollar I put in? A 2.2x MOIC means you received $2.20 for every $1.00 invested, inclusive of all distributions and return of principal.
MOIC is the right metric when you are focused on wealth accumulation rather than annualized efficiency. For an LP who is building a balance sheet over a decade, a 2.4x over 8 years may be more useful than a 2.0x over 4 years. Even though the shorter deal has a higher IRR. Because the dollar gain is larger.
What MOIC hides
MOIC is completely indifferent to time. A 2.0x MOIC over 3 years and a 2.0x MOIC over 12 years look identical in a MOIC column. In one case your capital grew at roughly 26% annually. In the other it grew at roughly 5.9% annually. When comparing deals using MOIC alone, you must always pair it with a hold period to get meaningful information.
Cash-on-Cash Return
Cash-on-Cash return measures annual distributions as a percentage of invested equity. If you invest $200,000 and receive $14,000 in distributions over the first year of operations, your cash-on-cash return is 7%.
This metric matters most to income-oriented investors: retirees, family offices running a distribution-based spending policy, or LPs who need current yield to cover a liability. A deal projected at a 20% IRR with zero distributions for five years has zero practical value to an investor who needs quarterly income. Cash-on-cash makes that constraint visible in a way that IRR does not.
The limitation is symmetrical with IRR's strength: cash-on-cash ignores appreciation entirely. A deal that pays 9% annually but returns only 0.9x on exit looks excellent in cash-on-cash terms and dismal in MOIC terms. Stable net lease deals are the classic case where cash-on-cash is high, MOIC is modest, and IRR trails value-add comparisons.
How Sponsors Game Each Metric
Understanding manipulation patterns is not a cynical exercise. It is due diligence. The patterns are consistent enough across the industry that you should look for them in every deal package.
| Metric | Common manipulation | How to detect it |
|---|---|---|
| IRR | Aggressive refinance proceeds returned in year 2-3 inflate the discount rate without improving total return | Check MOIC alongside IRR. If IRR is 20%+ but MOIC is under 1.8x on a 5-year hold, ask where the early cash flows come from |
| IRR | Short projected hold period creates mathematically high IRR with limited absolute gain | Always convert: a 25% IRR over 2 years is a 1.56x MOIC. Ask yourself if that dollar gain justifies the risk |
| MOIC | Long hold period masks a low annualized return. A 2.0x over 10 years is 7.2% annually, trailing many liquid alternatives | Ask for the hold period and calculate the implied IRR. 2.0x / 10 years is not the same proposition as 2.0x / 5 years |
| Cash-on-Cash | Distributions funded by return of capital or construction loan proceeds, not operating income | Request the cash flow waterfall. Distributions in years 1-2 of a ground-up deal are almost always return of capital, not yield |
| All three | Projections built on optimistic rent growth (5%+), aggressive exit cap compression, or current market rents applied to unrenovated units | Ask for the sensitivity table showing returns if exit cap rate is 50bps higher than projected and rent growth is 0% |
Worked Example: Same MOIC, Different IRR
Consider two deals. Both require $500,000 of LP equity. Both return a 2.2x MOIC, meaning you receive $1,100,000 in total.
Deal A wins on IRR by roughly 15 percentage points. A fund-of-funds benchmarking on IRR will prefer Deal A without hesitation.
But consider the LP who receives $43,000 per year from Deal B for seven years. $301,000 in distributions over the hold. Before receiving the remaining $799,000 at sale. That LP funded operating expenses, reduced concentration risk by deploying distributions into other assets, and maintained liquidity throughout the hold. The lower IRR reflects a longer hold, not a worse outcome.
Conversely, the LP in Deal A receives nothing for three years, then $1,100,000 in year three. If that LP has high-cost debt, family cash flow needs, or intends to redeploy into the next deal, the timing mismatch in Deal B is a real cost. Deal A is better for that investor.
The point is not that one deal is superior. It is that the right metric depends on your liquidity profile, not on which number is larger.
What to Ask a Sponsor
The questions below are designed to surface whether a sponsor understands their own model and whether the return projections are internally consistent.
A sponsor who leads with IRR on a long-hold deal may be obscuring a weak MOIC. A sponsor who leads with cash-on-cash on a value-add deal may be obscuring no distributions until stabilization. Ask them to defend the choice.
Ask for the attribution breakdown. If more than 60% of projected return comes from exit proceeds rather than operating cash flow, the deal is a bet on cap rate or price appreciation. That is a legitimate strategy but a different risk profile than an operations-driven return.
Any sponsor who cannot answer this in 60 seconds does not have a sensitivity table. Request the underwriting model, not just the summary page.
If the business plan shows distributions in year one of a ground-up development, ask where the cash comes from. Construction loan draws are a return of capital, not yield. This distinction matters for tax treatment and for understanding true operating performance.
This isolates operating performance from acquisition and exit assumptions. A deal that pencils at 4% cash-on-cash at stabilization is not an income-producing asset regardless of what the IRR model projects.
Deals regularly hold longer than projected due to market conditions, financing constraints, or operational delays. A 2.3x MOIC over 5 years becomes a 2.3x over 7 years if the market turns. Ask how the deal performs in that scenario and whether the preferred return continues to accrue.
Any credible offering memorandum will show all three metrics with clearly labeled hold periods and distribution schedules. If a deal package presents only one return metric, the appropriate response is to ask for the others before proceeding. Not to assume they are favorable.