Equity Multiple

What is Equity Multiple in Real Estate?

Equity Multiple is the process by which the total return on equity investment of a real estate is measured. So if this multiple on a particular investment is 2 times in 5 years, then it means that the equity that the person has invested will double in size in 5 years.

Explanation

Equity-Multiple

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Equity Multiple (wallstreetmojo.com)

Equity Multiple Formula

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

  • Present value Of the Investment = This is the value of the property 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 equity multiples.

  1. To calculate equity multiple, we need to know the money invested by the Investor. It is the initial investment.

  2. 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.

  3. Dividing the actual value of a property with the invested amount.

Examples

Example #1

David bought a property with $5M 10years ago. The present value of the property is $10M. Calculate the equity multiple of the property.

Solution:

Equity Multiple Formula = Present Value of the Property / Amount Invested

Equity Multiple Example 1

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

Example #2

Maxwell has 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. Calculate his Equity multiple.

Solution:

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

Equity Multiple Example 2

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

How does it work in Real-Estate?

It is used in real-estate to show the return from the investment. Real-Estate dealers show the projected multiple to buyers in order 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, then by how many folds will the money increase. So this method is quite popular in the real-estate world.

Equity Multiple vs. IRR

Advantages

  • These are easy to calculate. There is no tough calculation involved in the calculation.
  • It shows how much fold the investment will increase. Unlike other return calculations, where investors will have to calculate the future value by adding the returns year on year.
  • It is inclusive of future value, income from investment as well as 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 2 was reached within 1 year, 2 years, or 5 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 equity multiple will also change.

Conclusion

It is a common method by which the total return from an investment is calculated. Property dealers often portray this multiple to sell properties. Investors should consider the time factor before considering the multiple. If there are two investments with equity multiple 2, then you should see the time frame. If the first investment has a time frame of 5 years and the second one with the time frame 10 years, then obviously you should consider the first investment.

Recommended Articles

This article has been a guide to What is Equity Multiple & its Definition. Here we discuss the formula to calculate equity multiple and how it works in real-estate along with examples, advantages, and disadvantages. You can learn more about from the following articles –