In this example, the equity multiple is 6.08x, indicating that for every dollar invested, the investor received $6.08 in total cash distributions. The equity multiple is commonly used in commercial real estate investment analysis. In this article, we defined the equity multiple, discussed what it means, and the walked through an example step by step. We also compared the equity multiple to the internal rate of return, since these two metrics are commonly reported side by side. We showed an example of how the equity multiple can add some context to the IRR by indicating an investment’s absolute return potential. Let us take a minute to understand why a higher ratio may not always be a good indicator.

What is a good equity multiple?

This may not be suitable for investors who need more immediate or consistent cash flow. Suppose an investor is trying to decide which of two properties to purchase. As part of their due diligence, they create a proforma financial projection of the total cash distributions, for each property, expected for a five year investment holding period. However, the major downside to using equity multiple is it does not take into account the amount of time it takes bookkeeping to achieve it.

Why Work with BAM Capital for Multifamily Real Estate Syndication​

The equity multiple is calculated by dividing the total profits plus your principal investment by the principal invested. The major difference between the IRR and the equity multiple is that they measure two different things. The IRR measures the percentage rate earn on each dollar invested for each period it is invested. The equity multiple measures how much cash an investor will get back from a deal.

Example #2 – Impact of consistent cash flows

• While equity multiple is a useful metric for comparing the potential profitability of different investments, it’s important to consider property-specific factors that may impact an investment’s performance.
• Equity multiple is also a valuable tool for comparing different commercial real estate investment opportunities.
• However, the major downside to using equity multiple is it does not take into account the amount of time it takes to achieve it.
• As such, it is in investor’s best interests to be conservative when estimating it so as to not over artificially boost potential returns.
• IRR takes into account the timing of cash flows and provides an annualized return percentage, making it easier to compare investments with different holding periods.

The total invested cash is simply all capital that was originally used to purchase and rehab the property. This usually includes the down payment on the loan (or the purchase price, if not using financing), purchase and closing costs, as well as rehab and repair costs. Equity multiples measure the return potential real estate cash flow of stock for a given period of holdings in comparison with the amount of money you deposit. The equity multiple doesn’t tell you anything about the inherent risk in a transaction.

What is a Good Cap Rate for Multifamily investing?

• These properties generate revenue better than smaller deals and insulate investors from the default of any one tenant or other disturbances that occur with real estate investments.
• To identify the total cash distributed, they add the initial $100,000 investment with the $42,500 from cash flow distributions and the $65,000 of net profit from the exit for a total of $207,500.
• What’s the difference between the equity multiple and the internal rate of return?
• An ROI of 20% means that an investment has generated a return of 20% of the original investment.
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• They also worry less about vacancies since there are multiple units to be filled up.
• Effectively, it’s a simple way to show the potential investment property can double an investor’s money.

An equity multiple, where you get back more than you invested within a year, is anything 1.0 or higher. This means that the investment generates as much cash flow as the amount of equity invested. The equity multiple formula is a simple equation that allows investors to calculate the return on their investment. Total Cash Distributions Received by the Investor includes all cash flows from the investment, such as operating income, refinancing proceeds, and sale proceeds at the end of the investment period. Typically, a multifamily syndication lasts anywhere from 2 to 7 years, though there are equity multiplier exceptions for shorter and longer cycles.

Investors should use equity multiple in combination with other financial metrics to gain a more comprehensive understanding of an investment’s performance. In a commercial real estate investment, the equity multiple is the total cash distributions received from an investment, divided by the total equity invested. Establishing target equity multiples for commercial real estate investments is an important way to set performance benchmarks and monitor the success of an investment strategy over time.

What’s the difference between IRR and Equity Multiple?

When combined with other investment formulas, you can quickly screen real estate deals and only invest in properties that optimize your returns. Let’s say this building sells for $600,000 after 5 years, as in the previous example. Equity multiples offer a concise way to gauge the return on equity investment, providing clarity on the profitability of a deal. Understanding these multiples is key to making informed investment decisions and maximizing returns.

• Total cash invested encompasses all contributions that are paid by investors.
• For example, you might invest in a deal that produces just enough cash flow each year to break even over 5 years, buying the land for $1,000,000 in cash.
• When using equity multiple to compare potential investments, it’s important to ensure that the investments are truly comparable in terms of their risk profile, property type, location, and other key characteristics.
• It answers the most fundamental question of how much an investment will return, however.
• The reason is that the interest expense for debt will be relatively low compared to the cash flows received from rental.
• In other words, the equity multiplier shows how much investors grow their money by.

As we have discussed, the equity multiple for property investment is the ratio of total cash distributed to total cash invested. Hence, an equity multiple greater than one indicates that you have not only got your principal back but also made a profit. Which is the better measure to use when you analyze a commercial real estate deal?