Equity Multiple

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21 Aug, 2024

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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.

What is Equity Multiple?

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.

Equity Multiple Explained

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.

Formula

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

How To Calculate?

Below are the steps to calculate the target equity multiple..

To calculate the figure, we need to know the money invested by the Investor. It is the initial investment.
The next step is the projection or actual value of the property after a certain period.
This step is very important. In the case of property dealers, they will try to portray this figure BIG as they want to sell the property.
Dividing the actual value of a property with the invested amount will give the target equity multiple.

Examples

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.

Advantages

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.

Disadvantages

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.

Equity Multiple Vs IRR

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.

Frequently Asked Questions (FAQs)

What is the formula for calculating Equity Multiple?

The formula can obtain this value, Present Value of the Investment / Amount of Money Invested. It entails how many folds the value of the investment has increased.

How is equity multiple different from IRR?

Internal Rate of Return (IRR) is the discount rate required to bring an investment's future worth into line with its current value. Equity Multiple, on the other hand, is the multiple that determines by how many folds the value of the investment will increase.

What is a good Equity Multiple?

This value is a very easy and accurate multiplier to determine the growth of an investment. However, it also entails the future value of the investment and factors for interest rates. A good Equity Multiple is greater than 1.0x