In this article, we’ll explain what Equity Multiple is and why you should be using it to help analyze an investment opportunity.
The equity multiple (EMx) indicates how much cash you get back from investments. It is considered to be one of the most effective performance metrics in Commercial Real Estate (CRE) and paints a picture of the growth of an investor’s capital over time.
What Exactly Is The Equity Multiple Metric?
Also referred to as the “Realization multiple” it is the total amount returned to you over the life of the investment, divided by the amount you initially invested (Total cash distributions/Total equity invested). It can help you make smart investment decisions or avoid potential poor property investments.
Calculating The Equity Multiple
Let’s simplify it using this formula:
Equity Multiple = Total Cash Distributions ÷ Total Equity Invested
Example: if the total equity you invested into a commercial property in Jackson, MS was $1,000,000. The cash distributions you have received from the property thus far totals to $5,000,000, then you would divide $5,000,000 by $1,000,000.
Equity Multiple = $5,000,000 ÷ 1,000,000
This would provide you with an equity multiple of 5.0x.
If you invested $1 into this project, you would expect a return of $5. If your equity multiple on a property is greater than 1.0x, you will receive more cash than you invested, if it is lower than 1.0x you will receive less cash than the amount you initially invested.
Why You Should Combine The Equity Multiple With Other Metrics
Before putting hundreds of thousands of dollars into a potential investment, it’s no surprise that we want to ensure we evaluate our options thoroughly. We can do this by combining the Equity Multiple with the Internal Rate of Return (IRR).
The Internal Rate of Return (IRR) utilizes a multitude of concepts which the Equity Multiple leaves out. IRR provides a percentage metric which includes time and profit. Calculating how much return you get from an investment in a certain time period is easy with this metric. The Equity Multiple lacks a time frame. When used together, they are a power-house for visualising the profitability of a potential property investment opportunity.
To Summarize:
The Equity Multiple can be a powerful tool – if paired with the IRR. On its own it boasts a clear and easy-to-grasp method of calculating how much cash will be returned to your pocket after investing in a property but doesn’t represent the length of time your money is held up in investments. So as a stand alone metric, the Equity Multiple will allow you to enhance your investment accuracy and decide whether an investment would be a good idea or not.
For more information about equity multiple or if you’re looking for that perfect commercial property, reach out to our commercial real estate Mississippi team.