Why Some Family Offices Care About IRR More Than Cash-on-Cash or Equity MultipleNew Post
I had a conversation today with a Family Office
Their group provides a debt-plus-equity solution that can fund up to 95% of the capital stack, with a $5 million minimum. In other words, they are not just writing a small LP check. They are stepping into a highly structured capital position where timing, execution, leverage, and exit matter a lot.
During the conversation, he said something that caught my attention:
“We really only look at IRR. It has to be 20%.”
That made me pause.
Because in real estate, we often talk about three major return metrics:
Cash-on-cash return.
Equity multiple.
Internal rate of return, or IRR.
Each one tells a different story.
But depending on where you sit in the capital stack, one metric may matter much more than the others.
Cash-on-Cash Tells You About Income
Cash-on-cash return measures annual cash flow compared to the cash invested.
For example, if an investor puts in $100,000 and receives $8,000 in annual distributions, that is an 8% cash-on-cash return.
This is a very useful metric for investors who care about current income.
Many passive investors like cash-on-cash because it feels tangible. It tells them, “How much money am I getting paid while I wait?”
For retirees, income investors, and investors who want regular distributions, cash-on-cash matters a lot.
But cash-on-cash does not tell the full story.
A deal could have strong cash flow but very little appreciation. Or it could have weak early cash flow but create significant value at sale.
Cash-on-cash answers the income question.
It does not fully answer the wealth creation question.
Equity Multiple Tells You How Much Wealth Was Created
Equity multiple is simple.
If you invest $100,000 and receive $200,000 back over the life of the deal, that is a 2.0x equity multiple.
This is one of my favorite metrics because it tells investors how much total money they made.
It is clean. It is easy to understand. It does not get too cute.
A 2.0x multiple means you doubled your money.
A 1.5x multiple means you made 50% on your money.
A 2.5x multiple means you got two and a half times your original investment back.
For long-term wealth builders, equity multiple matters a lot.
But here is the problem: equity multiple does not tell you how long it took.
A 2.0x return in three years is very different from a 2.0x return in ten years.
Same multiple. Very different investment performance.
That is where IRR comes in.
IRR Tells You About Speed
IRR measures the annualized return of an investment while factoring in timing.
It does not just ask, “How much money did we make?”
It asks, “How fast did we make it?”
That is why institutional capital, family offices, private equity groups, and structured capital providers often focus heavily on IRR.
They are not only looking at profit.
They are looking at capital velocity.
Read more about IRR here:
https://peaksquareventures.com/blog/what-is-irr-and-how-to-calculate-irr
https://peaksquareventures.com/blog/what-s-the-difference-between-irr-and-arr
If they put money into one deal, that money cannot be used somewhere else. So they want to know how quickly their capital comes back and how efficiently it compounds.
This is especially important for a group providing up to 95% of the capital stack.
They are carrying a large portion of the risk. They are helping solve the sponsor’s capital gap. And because they are putting so much of the money into the deal, they need the deal to perform quickly and cleanly.
A 20% IRR target tells me they are not looking for a slow, stable, coupon-like real estate investment.
They are looking for a high-conviction execution play.
Why They May Not Care as Much About Cash-on-Cash
Cash-on-cash may be less important to them for a few reasons.
First, they may not be investing for current income.
A family office or structured capital group may be more focused on total return and capital recycling than monthly or quarterly distributions.
Second, if they are providing debt plus equity, their return may not come in the same way a normal LP investor gets paid. Their economics may include interest, preferred return, fees, warrants, profit participation, or a structured exit.
Third, in a heavy value-add or distressed deal, early cash flow may not be the main driver anyway.
If a property needs renovation, lease-up, management cleanup, expense control, or repositioning, cash flow may be light in the first year or two. A cash-on-cash metric may make the deal look unattractive early, even if the exit creates strong total returns.
That does not mean cash-on-cash is unimportant.
It just means it may not be the primary decision-making metric for that type of capital.
Why They May Not Focus on Equity Multiple Either
Equity multiple is important, but it can hide timing risk.
Let’s say two deals both produce a 2.0x equity multiple.
Deal A doubles the money in three years.
Deal B doubles the money in eight years.
Both are technically 2.0x deals. But Deal A is much more attractive to capital that cares about speed, redeployment, and annualized performance.
This is why a family office acquisition specialist may say, “I need to see a 20% IRR.”
He is really saying:
“I need to know this deal creates enough return fast enough to justify the risk.”
And when the capital provider is coming in at up to 95% of the capital stack, that makes sense.
They are not just asking, “Will this deal make money?”
They are asking:
“How fast do we get paid back?”
“How quickly does the business plan execute?”
“What happens if the exit is delayed?”
“What is the risk-adjusted return?”
“Can this capital be recycled into the next opportunity?”
The Danger of Looking Only at IRR
That said, I do not believe investors should look only at IRR.
IRR can be manipulated by timing.
A deal can show a high IRR because the hold period is short, but the total profit may not be that impressive.
For example, a quick flip may show a high IRR, but only produce a 1.3x equity multiple.
That may be attractive for some capital providers, but it may not be enough for long-term wealth builders.
This is why I believe serious investors should look at all three metrics together.
Cash-on-cash tells you income.
Equity multiple tells you total wealth created.
IRR tells you speed and efficiency.
One metric alone can mislead you.
Together, they tell a much better story.
How I Think About It
For Peak Square Ventures, we typically care about a combination of metrics.
We want to understand:
Can the deal cash flow?
Can it protect investor capital?
Can it create meaningful upside?
Can it survive delays, cost overruns, and interest rate pressure?
Can it still work if the exit cap rate moves against us?
Can it produce both income and long-term wealth creation?
A 20% IRR sounds attractive, but I still want to know how we get there.
Is it from real NOI growth?
Is it from rent increases that the market can actually support?
Is it from aggressive exit assumptions?
Is it from high leverage?
Is it from a short hold period?
Is it from refinancing proceeds?
Is it from cap rate compression?
Because not all 20% IRRs are created equal.
Some are built on real operational improvement.
Some are built on a spreadsheet.
Final Thought
The conversation reminded me of something important.
Every investor has a different lens because every investor has a different position in the deal.
A passive investor may care most about cash-on-cash.
A long-term wealth builder may care most about equity multiple.
A family office or structured capital provider may care most about IRR.
None of them are wrong.
They are just answering different questions.
The mistake is using one metric to answer every question.
In today’s market, especially with higher interest rates, tighter debt, insurance pressure, and slower exits, investors need to understand not just what the projected return is, but what is driving that return.
Because the best deals are not the ones with the prettiest IRR.
The best deals are the ones where the return is real, the assumptions are defensible, the downside is protected, and the business plan can actually be executed.
That is where disciplined underwriting matters.