Equity Multiple

Equity Multiple explains how the investment multiplies over the years. It helps measure the total return an investor gets from their investment. Thus, the present value of the money invested is divided by the total investment, which is used to judge if an investment is profitable.

If an investor’s multiple on a particular investment is two times in 5 years, then it means that the equity that the person has invested will double in size in 5 years. Such a measure is particularly useful if the investment is made for a longer horizon. However, this is not the only measure of return. There are many other things to consider for evaluating an investment opportunity.

• Equity multiple calculation determines the return on investment, and if often used in the field of real estate.
• It acts as a multiple to calculate the ROI for an investment. If the multiple scores 5 in five years, the value of the investment is likely to be five times what it is today in five years.
• The formula for calculating the multiple is the Present Value of the Investment / Amount of Money Invested.
• This multiplier is frequently used in real estate in which the investor can estimate how much value a real estate investment can generate after a time period.

• It helps to gauge the ROI made by your own money. If you have taken debt and it has helped increase the return, then this multiple will increase. Every industry has a specific kind of measuring mechanism that helps them portray the real return of investing in that industry. The most common measuring mechanism of return in the case of the real estate industry is this calculation.
• Equity means the money invested from a pocket, or in other terms, the actual investor's money that got invested. Multiple means folds. It shows how much your money has increased that you have invested in real estate. We can also explain this concept with the help of the levered equity multiple. If the return on investment is 200% and you have only $200M, but you borrowed $400M more, the total return will be 200% of (400 + 200) = $1200M. So this is coming out to be 1200/200 = 6 Times. Earlier the multiple without debt was 400/200 = 2 times. So a levered equity multiple is more than what it is without leverage.
• An equity multiple reviews is used in real estate to show the return on the investment. For example, real-Estate dealers show the projected multiple to buyers to sell properties. Investors find it easy to understand as the return is presented in multiple calculations. So an investor sees that if they invest money in real estate, how many folds will the money increase. So this method is quite popular in the real-estate world.

Equity Multiple = Present Value of the Investment / Amount of Money Invested

• Present value Of the Investment = This is the property's value in present terms.
• Amount of Money Invested = How much money is invested from the pocket of the investor

Let us try to understand the equity multiple calculation with some examples.

Example #1

David bought a property for $5M 10years ago. The present value of the property is $10M. First, calculate the multiple of the property.

Solution:

Formula = Present Value of the Property / Amount Invested

So David has earned a return equivalent to 2 times his investment in 2 years.

Example #2

Maxwell bought a property for $8M 5 years back and is earning an income of $200,000 every year from the property. The current value of the property is $25M. Let us do the calculation.

Solution:

Equity Multiple = (Present Value of Property + Income from Property) / Amount Invested

So Maxwell has earned a profit equal to 3.25 times his investment.

• These are easy to calculate. There is no tough calculation involved in it.
• It shows how much the investment will increase. Unlike other return calculations, investors will have to calculate the future value by adding the returns year on year.
• It includes future value, income from investment, and interest paid on capital. So this portrays the true picture considering all the factors.

• It doesn’t consider the time factor. If the multiple throws a result of 2, it doesn’t specify whether the multiple two was reached within one year, two years, or five years.
• It doesn't compare the interest rate that is prevailing in the market. It is more investor specific. If the initial investment changes, then the multiple value will also change.

• An equity multiple review gives a better understanding about how much return an investment will be able to give after a few years. But IRR which is the internal rate of return. shows the return percent on investment of one dollar. It means the discount rate needed to make the future value of an investment equal to the present value of the investment. It is the discount factor, so if the IRR is more than the interest rate prevailing in the market for a particular project, then it is logical to put the money in it and not invest it in market securities.
• Equity multiple doesn't compare the return with the return from the market. It shows how many folds your investment has gone up. So this return is more investor specific. It will change from investor to investor if an investor has invested a higher amount for a similar property than another investor. Then  it will be less for an investor who has spent more.

This article has been a guide to what is Equity Multiple. We explain its formula, calculation, examples, its difference with IRR & its advantages and disadvantages. You can learn more about it from the following articles –

• Calculate PV
• Short Sale in Real Estate
• Stock vs. Real Estate Investment
• Compound Interest Types
• Times Interest Earned Ratio Formula