When investing in multifamily or other types of commercial real estate, a common calculation used to measure investment performance is the Equity Multiple.
The Equity Multiple represents how much an Investor is projected to receive in total distributions over the life of the investment, based on his/her total capital invested.
Equity Multiple = Total Distributions Received / Total Capital Invested
An actual Equity Multiple calculation would look like the following:
2.23 = $389,557 / $175,000
Where 2.23 is the Equity Multiple, $389,557 is the Total Distributions Received, and $175,000 is the Total Capital Invested.
As shown above, the Equity Multiple is expressed as a decimal, such as 1.81 or 2.08, and the higher the better. In fact, an Equity Multiple of less than 1.0x means the Investor’s return is less than he/she actually invested in the first place.
For example, an Equity Multiple of 1.63 indicates that over the life of the investment, an Investor is projected to receive back 100% of their total capital investment plus an additional 63% on that capital. Or put another way, the Investor will receive a return of $1.63 for every $1.00 invested.
On the other hand, an Equity Multiple of only 0.81 indicates that an Investor has only received back 81% of their capital invested.
Here’s an actual real estate example.
Assume we purchase a 168-unit apartment community for a total price of $19,320,000 with a 5-year Holding Period, in which our total capital invested is a 35% equity investment of $6,762,000.
Our numbers are as follows:
- Sum of all Distributions in Year 1 – Year 5 = $3,187,800
- Net Profit Distributed from Sale (at end of Holding Period) = $9,027,400
- Total Capital Investment = $6,762,000
Therefore, our Equity Multiple is:
($3,187,800 + $9,027,400) / $6,762,000 = 1.81
The Equity Multiple is one measure that directly shows how leverage can be such a powerful tool in real estate investing.
For example, if we purchase a property with all cash for $1,125,000 as our Total Capital Investment and receive Total Distributions of $1,950,000 over a 5-year Holding Period, then our Equity Multiple is 1.73.
However, if we purchase that same $1,125,000 property with 35% equity, or $393,750 as our Total Capital Investment, and after paying debt service, we receive Total Distributions of approximately $1,096,400 over a 5-year Holding Period, then our Equity Multiple is 2.78.
For these reasons, the Equity Multiple is a common metric to review when evaluating potential investment opportunities.