In this episode of Multiple Perspectives, host Daniel Brereton dives into the concept of risk-adjusted returns and its application in real estate investing. Investors often focus on the potential returns of a deal, but understanding how to factor in risk is crucial to making informed investment decisions. Daniel walks through the differences in how returns and risks are measured in public vs. private markets, and why it’s essential to go beyond just looking at internal rate of return (IRR) figures when evaluating real estate opportunities.
- Risk-Adjusted Returns: Comparing investments requires accounting for risk. For example, government bonds offer lower returns with minimal risk, while stocks like GameStop present high volatility.
- Public vs. Private Markets: Public market returns use compound annual growth rate (CAGR), while private real estate investments are measured by internal rate of return (IRR).
- Assessing Risk in Real Estate: In private commercial real estate, risk isn’t measured the same way as in public markets. Key factors to assess include the deal’s debt coverage, cap rate spreads, and market conditions.
- Look Beyond IRR: An investment’s return potential must be weighed against its risk, factoring in the quality of the property, sponsor, and market conditions.
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risk-adjusted returns, real estate investing, IRR, commercial real estate, private markets, public markets, debt coverage, investment risk, return potential, EquityMultiple