Commercial Mortgage Quick Reference Guide

Equity Multiple

Equity multiple is one of the most important metrics in commercial and multifamily real estate, and is used to compare the amount of cash a property generates to the amount of equity invested. When looked at alongside IRR (internal rate of return), and cash-on-cash returns, equity multiple can provide an excellent determination of whether a property is likely to be a profitable investment. While multifamily lenders may look at a property’s equity multiple, it is mainly used by investors. In comparison, lenders are more likely to look at other metrics, such as DSCR, LTV, or debt yield.

The Equity Multiple Formula

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. It 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 an apartment 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 apartments in that market was 1.5, it would be an excellent investment. In contrast, if the average equity multiple was 2.5, it would likely be a poor investment. Whether a certain equity multiple is a good also depends on the time length involved. An equity multiple of 2 over a 2-year period would mean that a property is extremely profitable, while over a 20 or 30-year period, it would indicate that the property is a rather poor investment.

Equity Multiple vs. IRR

Internal Rate of Return, or 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. While IRR uses time value of money (TVM), equity multiple does not. 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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