Only What Matters: Equity Multiple

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All You Need to Know About Equity Multiple
What is it?

Equity multiple is the second most popular profitability metric for real estate investors and developers.

How is it calculated?

Equity multiple describes the number of times an investment is multiplied. It is calculated by dividing an investment’s outflows to investors by its inflows from investors. Typically, the number is shown as an integer followed by the letter “x” … e.g. 2.1x

Why is it the “second” most popular return metric?

The most common return metric is internal rate of return (IRR). It takes into consideration an investments profitability and timeline. Equity multiple only considers an investments profitability.

Why would I use Equity Multiple instead of IRR?

An investment’s equity multiple isn’t as easily manipulated as IRR. While an investments timeline can be shifted backward or forward, the equity multiple simply considers the cash flows an investor contributes and receives.

What else should I know?

Because equity multiple doesn’t consider an investment’s timeline, it should only be used to compare two different investment opportunities when their timelines are similar.

Equity multiple is one factor that should be considered when contemplating an investment. Other important return metrics include IRR and yield (cash on cash return). Calculation of risk metrics like debt service coverage ratio and loan to value are also part of a good investment analysis.

Written by Bullpen Editors
ABOUT THE AUTHOR

Bullpen editors partner with the top commercial real estate consultants from the Bullpen platform to share knowledge and expertise about big industry topics. Read. Enjoy. Share!

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