If you’ve reviewed a real estate syndication opportunity, you likely came across the term “equity multiple”. Even if you haven’t, this term will come up and is important to understand as a passive investor!
Equity Multiples & Passive Investors
As an investor in multifamily real estate, it’s important to know what you’re getting out of the deal. Part of that awareness comes from understanding the metrics presented in the investment summary. Equity Multiple is one of those metrics.
What is Equity Multiple?
Equity Multiple is a way to measure how much you might earn back from this investment compared to what you initially put in. It is commonly represented with values such as 2x or 1.5x over the hold period, which is typically 3-5 years.
An Example
Think of it like this: Let’s say you invest $100,000 in a syndication deal. Over time, as it generates cashflow, you receive some of it as a return on your investment. Then when the property is sold at the end of the project, you also receive gains from the proceed of the sale.
The Equity Multiple takes into account not just how much money you’ll get back, but also how many times more than your initial $100,000 you’ll end up with!
So, if the Equity Multiple is 2.0x over a 5 year holding period, it means you’re projected to get back twice the amount you initially invested, which would be $200,000!
Is The Equity Multiple Guaranteed?
No, this is a projected return, and it’s a way for the sponsoring team to estimate how much money investors can make from the multifamily investment. It is based on things such as the property’s historical performance, market trends, business plan success, and other factors.
How Do I Measure My Actual Equity Multiple?
The Equity Multiple is calculated by dividing the total amount of cash flows and sale proceeds by the initial investment. Let us return to the previous example.
Holding Period: 5 Years
Initial Investment: $100,000
Cash Flow Distributions During Holding Period: $30,000
Proceeds from Sale: $160,000
Total Returns: $190,000
Actual Equity Multiple: $190,000 / $100,000 = 1.9x
The Equity Multiple is a thrilling glimpse into your potential wealth! It’s also wise to measure your own success while enjoying the adventure in your journey to financial freedom through passive investments!