For investors that aren’t already familiar with Real Estate Syndications, it involves multiple investors pooling their capital together to purchase no-hassle, hands-off investment properties that deliver passive income and appreciation to the investor. For additional details on real estate syndications, we recommend checking out the following blog posts:
One of the keys to selecting a great real estate syndication investment is performing due diligence and detailed analysis on the Sponsor, Market, and the Property. Our team here at Limitless Investing independently reviews every syndication opportunity prior to sharing with our investors to ensure they are only receiving high-quality, pre-vetted opportunities.
With that said, we believe it is important for investors to understand the Essential Real Estate Calculations that are utilized as part of this analysis. In previous posts we reviewed Net Operating Income (NOI), Cap Rate and Internal Rate of Return (IRR). Today we will be exploring the fourth calculation: Equity Multiple.
What is Equity Multiple?
The Equity Multiple is a metric used by real estate investors to evaluate a potential (or completed) investment by calculating the expected (or achieved) total return based on the initial investment.
Essentially, it’s how much money an investor could make on their initial investment. An equity multiple less than 1x means you are getting back less cash than you invested. An equity multiple greater than 1x means you are getting back more cash than you invested.
Why is Equity Multiple important?
Equity Multiple is a great tool to use for making a quick comparison between two or more investment options that a real estate investor is evaluating. When calculated properly, the equation can provide a quick look into the total profit that the investor can expect to earn from each potential investment.
Rather than just looking at the ongoing rental cash flow distributions, the multiple takes into account all distributions, which includes the property sale. This is key when comparing various real estate opportunities that have different business plans and distribution strategies as it allows the real estate investor to easily determine which will provide the largest total return.
While it may seem intuitive to always invest in the real estate opportunity with the highest Equity Multiple, investors also need to consider the importance of time, which is why IRR is so critical. For example, if a real estate property is purchased for $200,000 and sold 30 years later for a total return of $400,000, that’s a 2x equity multiple. While a 2x equity multiple may catch your attention, there are more profitable ways to invest that $200,000 over the course of 30 years.
How do I calculate Equity Multiple?
The calculation for Equity Multiple is relatively simple:
Equity Multiple = Total Distributions / Total Invested Capital
For example, let’s say you invest in a real estate syndication that provides with the following profile:
$50,000 initial investment
7% cash flow per year from rental income ($3,500 per year)
Property sells in year 3 for double the original investment (original $50,000 + $50,000 profit)
Using the formula we can easily calculate the Equity Multiple:
Equity Multiple = ($100,000 + $3,500 + $3,500 + $3,500) / $50,000
Equity Multiple = 2.21
This essentially means that your initial $50,000 investment is worth $110,500 after the investment has been completed.
How did we calculate that? Well once you know the Equity Multiple (which is provided in our real estate investment deal alerts), you can multiply it by your initial investment:
Total Return = Total Invested Capital x Equity Multiple
Total Return = 50,000 x 2.21
Total Return = $110,500
You are now armed with one of the most essential real estate calculations. If you’d like to explore how no-hassle, hands-off real estate syndications can offer attractive Equity Multiple, don’t hesitate to reach out to discuss your investing goals and subscribe to our blog for future content!
If you’re interested in learning more about investing in a real estate syndication, download your free copy of our eBook, Achieving Financial Freedom by Investing in No-Hassle, Hands-Off Real Estate