Equity Multiple Calculation For Commercial Real Estate Investors

Math is probably one of my least favorite things to do. So why am I even talking about equity multiple calculations? Because if you’re thinking about investing in a syndication, there are a few numbers you should know. They’ll tell you if the deal makes sense or if you should walk away.

This article explains what the equity multiple formula is and how it compares to other real estate metrics. So, when a syndicator starts throwing around numbers, you’ll know exactly what they’re talking about and what it means for your investment.

What is equity multiple?

Equity multiple measures the total cash distributions received compared to your initial total equity invested. It’s a view into an investment’s performance. The higher equity multiple, the better, since it means you make more on each dollar invested.

It basically tells you whether a commercial real estate investment was a good deal or not.

Types of equity multiples:

You’ll hear of a few different types of equity multiples, including:

• Levered equity multiple: This formula assumes that the GP plans to use bank financing as part of the project. The equity multiple formula looks at cash distributions after paying debt service. You’ll usually see higher returns in this scenario.
• Unlevered equity multiple: An unlevered investment assumes 100% equity and no debt. For example, our current project in Spain is a cash purchase with no debt and a projected unlevered equity multiple of 3.05.
• Multiple on invested capital (MOIC): This is another term for equity multiple.

Characteristics of equity multiples

Here’s a few key characteristics of equity multiples:

• Time-agnostic: The formula measures total return without considering your investment hold period. So an equity multiple of 3x your initial investment is great if you got that in 2 years. But if it takes 20 years, it’s not a good investment.
• Cash-focused: It’s an actual number based on actual cash flows.
• Risk assessment: A higher equity multiple means better performance unless it’s a 20-year investment, like I mentioned above.
• Benchmarking tool: It’s a helpful metric for making a quick comparison across different potential investments.
• Investor communication: GPs use this metric to provide simplified reporting to investors.

Why should you care about the equity multiple?

To calculate the equity multiple, start with how much cash you made. Cash distributions that passive investors might receive include:

• Monthly rental income
• Refinancing proceeds
• Cash at the property sale

So you take all the money received and divide that by your initial invested capital, which gives you the equity multiple. Let me give you an example from one of our previous hotel projects with simplified numbers for illustration purposes.

Initial investment

$1 Million. This was a 1031 Exchange rollover from several years of various commercial real estate property investments.

Cash flow

We bought this property in 2017 and held it for 8 years. It took one year to stabilize and create reserves before we started seeing cash flow. The total cash distributions from operations over the 8 years were $400,000.

Property sale

The property sale price was $2M over the initial purchase price.

Applying the equity multiple formula

Here’s how we calculate equity multiple for this property:

• Total cash distributions: $2,400,000
• Initial investment: $1,000,000
• Equity multiple calculation: $2,400,000/ $1,000,000 = 2.4

For every $1 of invested capital, we got back $2.40 over the holding period.

Now…. this is a property where we brought in an operations partner via a JV agreement and split all the profits 50/50. So while the property’s equity multiple was 2.4, our actual equity multiple was closer to 1.2.

Equity multiple vs. other real estate metrics

Equity multiple is just one of several metrics you can use to decide on syndications. Here are other metrics to know:

Internal rate of return (IRR)

Internal rate of return (IRR) is a measurement of the investment’s overall profitability that considers the time value of money. Getting $1M in 2-3 years is better than getting those total cash distributions in 10 years. Most people use specialized tools to calculate IRR so I won’t provide the formula here but the key components are:

• Initial investment amount: Just like with equity multiple, we need to know the initial outlay.
• Cash flows: This includes both inflows, like rent or other income, and outflows, like loan payments.
• Number of periods: We need to know the number of time intervals that the cash distributions occur. This could be payments on a monthly, quarterly or annual basis.

Using the specialized tools, you’ll get a discount rate, which is when the net present value (NPV) of all cash flows equals zero.

On every syndication, the GP will have a projected IRR based on their plans for the property. These are forecasts on future cash flows, but since they’re forecasts only, they may not happen this way at all.

Let’s look at my hotel example again and calculate the real internal rate of return. I found a GPT inside of ChatGPT that will do investment calculations, and I gave it these numbers:

• $1M initial investment
• 8-year hold
• 8 years of monthly rent at $400k total
• $2M cash at sale

And it gave me an internal rate of return of 12.9%. The GPT also gave me its opinion:

“A 12.9% IRR is solid and typical of a well-performing real estate or private equity deal. The rent yield is modest, but capital appreciation drives most of the return.”

Cash on cash return

This number takes the property’s pre-tax cash flow as a percentage of the total cash invested. It tells you how much passive cash income you’re getting relative to the cash put into the property. To calculate it, you take the annual pre-tax cash flow divided by invested capital and multiply by 100.

Taking the hotel example again, this looks like:

• Monthly rental income: $50,000
• Initial outlay: $1,000,000
• Cash on cash return calculation: $50,000/ $1,000,000 = 5%

Return on investment

Most people think about this metric for any kind of investment. It shows how much you made compared to what your invested equity. To calculate it, we just need the investment gain minus the investment cost multiplied by 100.

With the same hotel example, this looks like:

• Investment gain: $2,400,000 – $1,000,000 = $1,400,000
• Initial outlay: $1,000,000
• Calculation: $1,400,000/ $1,000,000 x 100 = 140%

Metric	What It Measures	Time Consideration	Best Use Case	Hotel example
Equity multiple	Total return magnitude	No	Quick comparison, absolute returns	2.4
IRR	Annualized return rate	Yes	Time-sensitive analysis, opportunity cost	14.7%
Cash-on-cash return	Annual cash flow yield	Partially	Income-focused investments	4.8%
Return on investment	Investment’s overall profitability	No	Performance of a real estate project	140%

Limitations of the equity multiple calculation

You can’t really just use one metric to evaluate property syndications. That’s because each has its own limitations, and equity multiple is no different. A few drawbacks include:

• No time value consideration: A 2.0x return over 2 years is way different from the same multiple over 10 years. The challenge is that multiple treat them the same, but the same equity multiple that gives you more cash sooner is better.
• Tax implications ignored: After-tax returns can be completely different between investments with the same equity multiple.
• Cash flow timing blindness: Equity multiple doesn’t distinguish between early versus late distributions.
• Return efficiency absent: Fails to measure capital efficiency or risk-adjusted performance

To get a complete picture of an investment opportunity, you’ll also want to consider the other metrics I shared earlier. This helps you get closer to understanding an investment’s absolute return potential.

Considering an investment’s potential risks

Even when you use the other metrics and put everything together, real estate investments always have risks. Be sure to do your own due diligence on both the opportunity and the syndicator in these areas:

• Track record: Review the syndicator’s track record and experience with similar properties or asset classes.
• Business plan: Ask about the business plan, projected returns, and key assumptions behind the deal.
• Financing: Consider the syndicator’s planned financing structure, including loan terms and how much leverage they plan to use.
• Market: Review the property’s market, location, and potential for long-term growth.
• Partnership agreement: Read the Private Placement Memorandum (PPM) and other offering documents so you’re aware of details like sponsor fees and performance incentives.
• Communication: Evaluate how well the sponsor communicates with investors and how often you’ll receive updates.

Equity multiple formula and investment opportunities

Real estate syndication opportunities almost always publish the projected IRR, cash-on-cash returns, and equity multiple. You can use this combination of metrics compared to the GP’s business plan to evaluate which projects you want to invest in.

In our current Barcelona Hotel Fund, for example, we’re projecting an unlevered IRR of 21.73% and an equity multiple of 3.05. Numbers like that only work when the business plan, market, and team align. If you’d like to see how we’re approaching this project and the business plan behind it, click here to learn more.

Equity multiple calculation: FAQs

What does 1.5 equity multiple mean?

It means that for every dollar you put into a commercial real estate investment, you receive $1.50 back over the investment’s lifetime. This adds up all the returns, including:

• Operating income: This can be rent payments or other income, like parking fees.
• Cash-out loan financing: If you refinance the property and pull out cash, this counts towards returns.
• Cash at property sale: This is money left over after selling and paying off the property loan.

And then divides those returns by the total equity investment you put into the deal.

What is a good equity multiple in real estate?

A good equity multiple depends on your investment style. You’ll see different equity multiples depending on the commercial real estate project. For example:

• Class A apartment complex: This is a more conservative type of investment with lower risk than other types of projects. You might see a lower equity multiple around 1.5 or so because the asset is already performing.
• Commercial office building: Say the syndicator finds a great deal on a commercial office project because it’s partially rented and needs capital investment to bring in more tenants. This is riskier and will have an opportunity for a higher equity multiple starting at 2 to higher.

So basically, any equity multiple of 1 or over is “good” but what you consider good might be different for someone else.

How to calculate equity multiplier?

To calculate equity multiple, add up all cash distributions received and divide by the total equity invested. Anything above 1 is a profitable investment. Anything below that is a loss.

• Total distributions: Rental income, money from refinancing, and proceeds at sale.
• Total equity invested: Initial capital, reinvested profits, and any additional funds invested with capital calls.

The information in this post is for informational purposes only and should not be considered tax or legal advice. Please consult with your own tax professionals and advisors before making any decisions or taking action based on this information.