SMALL, PRIVATE EQUITY GROUPS are flooding the marketplace, and investors are targeting cash-on-cash returns over internal rate of return (IRR), say industry experts.

The most active equityinvestors today are smaller, private syndicators or funds raised at the grassroots level in country clubs and from other groups of wealthy individuals. Many of these people are pulling their money out of the stock market and putting it into private investments, attracted by the relatively hefty returns. And the money is often local: The most likely equity investor these days is someone who drives past the asset every day.

Los Angeles-based CB Richard Ellis (CBRE) recently completed three multifamily deals in Phoenix. Of the 45 off ers received for those deals, only one group was not a private investor. “The capital we're dealing with now truly is individuals and private,” said Tyler Anderson, a Phoenix-based vice chairman of CBRE's institutional group.

Many in the industry believe there is a great deal of pent-up institutional equity waiting on the sidelines, but that may not be the case, says Michael Lowinger, a senior regional director with Chicago-based equity investor Wrightwood Capital.

The capital that his company represents, mostly from pension funds and life insurance companies, is still trying to decide how to approach real estate. “There's some paralysis in the marketplace in regards to decision making, and it remains to be seen whether that capital will put its foot on the accelerator to invest in the near future,” Lowinger says.

For instance, when an institution says it has raised a $1 billion fund, it really means that it has $1 billion in commitments. But those commitments are fluid. Investors can redeem their commitments and are increasingly doing so. “There is a peril that the commitments will not be there in the short run,” Lowinger adds.

Another perception in the multifamily industry is that distressed assets will soon flood the market, but that's only partially true. While the large amount of CMBS and bank loans coming due in the next year may cause more distressed assets to hit the market, lenders are pursuing an “amend, extend, and hope” model in the near term. “Lenders are giving extensions, and the government is getting involved, so I'm not sure the distress will be at the level that is generally thought of,” said Eric Snyder, a senior vice president with Newport Beach, Calif.-based investment manager Buchanan Street Partners.

And the distressed assets that are available are mostly on the low end. CBRE is currently working on deals for between 40 and 50 real estate owned (REO) properties, or properties seized by banks after foreclosure. A year ago, the company was only working on three REO opportunities. “A lot of them are [Class] C assets,” Anderson says. “But the banks aren't begging people to take it off their hands; they're trying to figure out what the asset is, manage it as best they can, and then sell it at the appropriate time.”

While some institutional buyers are asking for IRRs of more than 20 percent over a five-year term, the active investors today are focusing on cash-on-cash returns of between 8 percent and 12 percent.

Cash-on-cash returns are easier to underwrite since they look at immediate cash flow. Cash-on-cash deals work like a CD: When a bank pays a 5 percent return on a CD, it means you get 5 percent of the deposit amount. IRR executions are more complex and underwrite for diff ering amounts of annual cash flow.

Sellers should target cash-on-cash buyers, who will typically pay more for an asset than IRR-driven investors. “You don't want an IRR-driven buyer, because when you run the numbers, it really drives down the value of the property,” Snyder says. “Most of the time, a cash-on-cash buyer will pay quite a bit more than anybody else, so that's a good buyer to be targeting.”