Equity multiple essentially lets investors know how much money they stand to make on their upfront investment.
What is equity multiple?
Equity multiple is a commercial real estate term that refers to the total cash return an investment produces, divided by the total equity that was initially invested. If an investor uses the equity multiple formula and gets a result of under 1.0x, it means they will get back less cash than they invested, and therefore, the investment is not good. On the other hand, if they use the equity multiple formula and get a result larger than 1.0x, it means they will get back more cash than they invested, the markings of a successful investment.
If you need to calculate the equity multiple on a real estate investment, you use the equity multiple formula. To do this, divide the total dollars the investment earned by the total amount invested.
Equity multiple case study
During the Covid-19 pandemic, Leo purchased an old house in his neighborhood for $100K. He took out a loan with 20% down to buy the house. Today, with the real estate market hotter than ever, Leo received an offer to buy the home for $125K.
Leo wanted to use the equity multiple formula just to make sure he was getting his money’s worth from selling the home. He quickly runs the numbers and divides the equity earned ($25K) by his initial purchase ($100K), and sees that he would profit 25% from this deal.
With his initial investment of 20K, his equity earned comes out to $45K. This means he is getting back more from the property than he invested in it, and he is quite happy and eager to close the deal.
The bottom line
Investing in real estate is an excellent way to grow wealth and diversify your investment portfolio. To truly maximize the benefits of real estate investing, it’s crucial to know how to compare opportunities, especially in today’s market. That’s where equity multiple and the equity multiple formula come in to help give some investors peace of mind knowing they have made a great investment decision, or not, and they can re-group and re-invest.
