The equity multiple is a commonly used performance metric in commercial real estate, and yet it’s not widely understood. In this short article we’ll take a look at the equity multiple as it’s used in commercial real estate and we’ll also walk through several examples step-by-step.

## What Is The Equity Multiple?

First of all, what exactly is the equity multiple? In commercial real estate, the **equity multiple** is defined as the total cash distributions received from an investment, divided by the total equity invested. Here is the equity multiple formula:

For example, if the total equity invested into a project was $1,000,000 and all cash distributions received from the project totaled $2,500,000, then the equity multiple would be $2,500,000 / $1,000,000, or 2.50x.

What does the equity multiple mean? An equity multiple less than 1.0x means you are getting back less cash than you invested. An equity multiple greater than 1.0x means you are getting back more cash than you invested. In our example above, an equity multiple of 2.50x simply means that for every $1 invested into the project, an investor is expected to get back $2.50 (including the initial $1 investment).

What’s a good equity multiple? As always, this depends. Context is required in order to determine what a “good” equity multiple means. Typically, the equity multiple is most relevant when compared with other similar investments.

## Equity Multiple Proforma Example

Let’s take a look at an example of how to use the equity multiple in a commercial real estate analysis. Suppose we have an acquisition that requires $4,300,000 in equity and we expect the following proforma cash flows:

If we add up all of the before tax cash flows in the proforma above, then we’ll end up with total profits of $9,415,728. This results in a calculated equity multiple of $9,415,728/$4,300,000, or 2.19x.

What does a 2.19x equity multiple mean? This simply means that for every $1 invested into this project an investor is expected to get back $2.19 (including the initial $1 investment).

Is 2.19x a good equity multiple? As mentioned earlier, the fact that it’s higher than 1.0x means the investor is getting back more money than initially invested. However, the equity multiple alone doesn’t say anything about the timing because the equity multiple ignores the time value of money. In other words, a 2.19x equity multiple is much better if the holding period is 1 year versus 100 years. This is why the equity multiple is most relevant when compared to equity multiples of other similar investments.

## Equity Multiple vs IRR

What’s the difference between the equity multiple and the internal rate of return? This is a common question since the equity multiple is often reported along with the IRR.

The major difference between the IRR and the equity multiple is that they measure two different things. The IRR measures the percentage rate earn on each dollar invested for each period it is invested. The equity multiple measures how much cash an investor will get back from a deal. The reason why these two indicators are often reported together is because they complement each other. The IRR takes into account the time value of money while the equity multiple does not. On the other hand, the equity multiple describes the total cash an investment will return while the IRR does not. Let’s take a look at an example of how these two measures can be used together.

The equity multiple is a performance metric that helps put the IRR into perspective by sizing up the return in absolute terms. The equity multiple does this by describing how much cash an investment will return over the entire holding period. Suppose we have two potential investments with the following cash flows:

As you can see, the first investment produces a 16.15% IRR while the second investment only produces a 15.56% IRR. If we were using the IRR alone then the choice would be clearly be the first set of cash flows. However, the IRR isn’t a silver bullet and doesn’t always tell the full story. This can be seen by looking at the equity multiple for both investment options. Although the second potential investment has a lower IRR, it has a higher equity multiple. This means that despite a lower IRR, investment #2 returns more cash back to the investor over the same holding period.

Of course there are other factors to consider. For example, Investment #1 returns $50,000 at the end of year 1 whereas with Investment #2 you have to wait for 4 years to get $50,000 of cash flow. Depending on the context of these deals, this may or may not be acceptable. For example, if you plan on putting all of the cash flow from Investment #1 into a checking account earning next to nothing, then perhaps Investment #2 would make more sense since your cash will be invested longer. On the other hand, perhaps the cash flows from Investment #2 are more uncertain and you’d prefer the peace of mind that comes with getting half of your investment back in Year 1 with Investment #1.

These are issues that would be addressed in a full investment underwriting and there are also several other metrics and qualitative factors that could be considered. With that said, the equity multiple allows you to quickly understand how much cash a project will return to the investors, relative to the initial investment. It also adds some additional context to the IRR when looking at a set of cash flows to help you quickly size up an investment’s absolute return potential.

## Conclusion

The equity multiple is commonly used in commercial real estate investment analysis. In this article we defined the equity multiple, discussed what it means, and the walked through an example step by step. We also compared the equity multiple to the internal rate of return since these two metrics are commonly reported side by side. We showed an example of how the equity multiple can add some context to the IRR by indicating an investment’s absolute return potential.

Awesome article, thanks! Explained extremely well.

Thanks for such a great analysis here. It will be helpful for all commercial real estate developers.

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i think the author meant an equity multiple of 1.65 and 1.90 for investment #1 & #2, respectively.

Based on what? Did you see the formula definition up at the top of the article?

yes, the formula is clear: equity + profit/ equity. The mistake was that the principal (equity) was added twice. The IRR calculation is perfectly correct, but the equity multiple is not. The profit is $65k, and $90k in examples 1&2 (not $165k or $190k, obviously). So to calculate the equity multiple, add (principal 100+ profit 65)/100=1.65. Same applies to example 2.

Instead of basing profit on the initial cash invested like you did, the profit figure is really the net cash flow from the property. Another way to think about this would be the cash distributions from the project. We’ll update the article to clarify this.

He is correct.

EM results are wrong in both examples. Should be 1.65 and 1.9 respectively. Also, why make the EM formula more complicated than it needs to be. I can’t tell you how many times I’ve had to correct the same mistake you’ve just made in models. Calc should just be equal to the ABS of Net Cash Flow/Max Equity

Still difficult to understand this. Agree with Steve, looks like double counting on the equity side. If I bet 50m on a project (period 0) and get out of it with 100m in my pocket, that’s essentially 2, right (100/50)? Add the initial equity and you get 3. That’s some difference when you’re analyzing investments or valuing a property. Still an important one though.

We updated the article and simplified this since there was some confusion. The most important point here is to understand what formula someone else is using and to always be consistent when making comparison. This will ensure you are comparing apples to apples. Hope that helps.

Agree. Yet I still think the two IRR examples don’t reflect this point. I am trying to really understand this. We often calculate the equity cash flows in development/investment as simply a difference between revenues, and capital + operating expenses. You might have several negative and several positive cash flows. I’d simply divide the positive by the sum of the negative (with a plus sign). Do you think this would tell the story correctly?

Can you provide an example with some numbers?

Periods 0 -200000

1 3000

2 -1500

3 -25

4 25000

5 280000

9%

Profits & Losses / Initial Equity = 1.532375

Profits / ABS (Initial Equity + Losses) = 1.528346359

Yes this makes sense. As long as what you are comparing it to is calculated in the same way then it will be apples to apples.

Is Equity Multiple the same as ROE then?