Investors are always looking at key metrics to determine whether a deal is worth purchasing. Whether you are buying a single-family home with your own cash or syndicating a 250-unit apartment with investors capital, everyone wants to know they will achieve respectable returns. The equity multiple is used to review the total cash returns across the life of the deal. We can then take that multiple and compare it to other deals. This can indicate to the investor that one property may be a better opportunity than another. Let’s look at an example to help us see the equity multiple in action.
Formula: Equity Multiple = Total Cash Distributions / Total Capital Invested In the example below, we will assume that we purchased a property for $1 million. After our down payment ($300,000) and closing costs ($20,000), we have a total of $320,000 of cash invested into the deal. In order to close on the deal, we had to borrow the remaining $700,000 from the bank ($1,000,000 minus $300,000). We will hold the property for 5 years, recognizing positive cash flow every year. Finally, in year 5, we will sell the property for $1.2 million. After paying off the remaining loan amount of $626,934, we are left with a net amount of $573,066 from the sale proceeds. When we sum up the cash flows and sale proceeds, we get a 5-year total cash distribution of $664,566. We can now take our Total Cash Distribution and divide it by our Capital Invested. When we do this, we get our equity multiple of 2.1. We now have our equity multiple of 2.1 but what does that tell us? Simply put, for every dollar invested we will make $2.1. Another way of phrasing this would be that we have more than doubled our invested cash over the life of the investment. Now, can we say that this is a good equity multiple? That depends on how other properties’ equity multiples look with the same hold period. We may find that there are similar properties that have a 2.5 or 3 equity multiple. Does that mean we pick those? Maybe, but maybe not. Always remember that the equity multiple is only one of the many metrics that investors look at. Others include Cash-on-Cash Return, Average Annual Return, or Internal Rate of Return. A diligent investor must take all of these into account before choosing the correct property.
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