Commercial Mortgage Quick Reference Guide

Equity Multiple

A property’s equity multiple is one of the most important ways to determine whether it is a valuable and profitable investment. A property’s equity multiple can be calculated by taking a property’s total cash distributions over a specific time period and dividing it by the total equity an investor has put into the property.

The Equity Multiple Formula

Equity multiple can be calculated by using the formula below:

Equity Multiple = Total Cash Distributions/Total Equity Invested

For instance, if the amount of money invested in a property totaled $500,000, and the total cash distributions (after the sale of the property) equalled $1,000,000, the equity multiple would be ($1,000,000/$500,000 = 2). In general, equity multiples are based on the amount that’s derivative of the property sale.

In addition, equity multiples are usually used to compare similar properties in similar properties. For instance, in the example above, if the average equity multiple for that kind of property in that market was 1.5, it would be an excellent investment, whereas if the average was 2.5, it would likely be a poor investment. Whether a certain equity multiple is a good also depends on the time length involve. An equity multiple of 2 over a 2 year period would make a property extremely profitable, while over a 20 or 30 year period would make it a rather poor investment.

Equity Multiple vs. IRR

IRR is commonly compared (and sometimes confused with) equity multiple, as they are both similar metrics that attempt to determine the profitability and effectiveness of a real estate investment. Equity multiple focuses on the cash that a property generates over a specific time period, while IRR looks at overall return for each dollar invested into a property. The IRR formula is below:

t = time, C = cash flow, r = internal rate of return, and NPV = net present value.

t = time, C = cash flow, r = internal rate of return, and NPV = net present value.

If, like we mentioned in the example above, $500,000 was invested in a property and the total cash distributions equalled $1,000,000, for instance, $200,000 a year over a 5 year period, the internal rate of return would be 28.6%.

Equity Multiple vs. Cash-on-Cash Returns

In fact, equity multiple is more accurately compared to a property’s cash-on-cash returns, as this metric also compares the amount of cash a property has generated over a specific period of time. In most cases, however, a cash-on-cash is reported as an annual percentage, while equity multiple a number, usually calculated over a period of several years. The cash-on-cash returns formula is:

Net Operating Income (NOI)/Total Cash Investment

So, for instance, in the example we mentioned above, the property would have a cash-on-cash return of 40% ($200,000/$500,000), assuming the property has fully been purchased in cash. If the property is purchased with a loan, only the down payment will be counted as the total cash investment, but monthly mortgage payments will significantly reduce the property’s NOI.

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