As others have indicated, I believe that all have merit and it truly depends on your goals and objectives, utilization of financing, cost of funds, etc... It is important to note that while Cap Rate and Cash-on-Cash return can be calculated and evaluated based on the first year of owning/operating the property, in order to use IRR you have to make an assumption about selling the property. IRR looking backward or projected for potential investment can tell you more about the overall performance/return of an investment asset than Cap rate or Cash-on-Cash because it encompasses cash flow throughout the holding period , leverage/financing, and appreciation/gain, but as an underwriting/evaluation tool it has it's risks because you are forced to make assumptions about exiting the property. When using IRR it is important to be cognizant of how much return is driven by cash flow versus appreciation. If you have the choice, I would always prefer an investment vehicle with a good balance as it minimizes risk.
Feb 25, 2014