
Equity Multiples and What They Mean for Passive Investors
Any time a potential investor is reviewing real estate syndication investment opportunities, they’ll likely come across the term “equity multiple”. Even if they’ve purchased a primary home or a residential rental property before, it’s unlikely they’ve heard of equity multiples.
When it comes to passively investing in real estate syndications however, it’s an important phrase to know and understand.
What “Equity Multiple” Means for Investors Interested in Real Estate Syndications
As a new or seasoned real estate investor, it’s important to know what you’re getting yourself into. Part of that awareness comes from understanding the metrics presented in the investment summary prior to agreeing to the deal.
As passive investors review potential real estate syndication deals, the term “equity multiple” might seem confusing or even daunting if no one’s ever explained what exactly that means.
Alternately, our investors have shared with us that, after they grasp the concept of equity multiples, they are able to more confidently compare projected returns and make wiser investment decisions.
Defining “Equity Multiple”
The initial amount invested into a deal is an investor’s capital. That capital equals the amount of equity an investor has in the passive investment. Thus, the term Equity Multiple simply means the amount your capital (or equity) will be multiplied by the end of the deal.
If a real estate syndication deal has an equity multiple of 2x and a projected hold time of 5 years, that means investors can expect to double their capital (original investment) in that 5 year period.
The equity multiple is the total of the cash flow distributions plus the returns after the sale of the asset.
A Little Math to Help Demonstrate
How about we explore an example deal with a 2x equity multiple?
The investment (capital, also referred to as equity) is $100,000 and this deal has a projected annual rate of return of 8% with a 5 year hold period. This means the investor may receive about $8,000 per year for 5 years.
In other words, over a 5 year period, the investor will have received a total of $40,000 in cash flow distributions. Then, when the asset is sold, investors receive their initial $100,000 back, plus another, say, $60,000 in profit from the sale.
When the $40,000 in cash flow distributions and the $60,000 from the sale are added up, that’s $100,000 in total returns. The investor began with $100,000 and, not only got that back, but also earned an additional $100,000 cash.
In this example, the investor has doubled their money, which is what it means to have an equity multiple of 2x.
How Passive Investors Might Look at Equity Multiples
In real estate syndication deals, it’s actually quite reasonable to expect to double your investment over the course of 5 years, but that doesn’t mean these deals are easily found. Here at Viking Capital, we aim to present our investors with a 2x equity multiplier over a 5 year hold period.
Remember, the equity multiple, just like any other projected return or rate, is projected. That means it’s estimated using formulas, algorithms, and expectations of the market, and it’s not guaranteed. The actual returns may be below the projections shown on the investment summary, or they may far exceed what was thought possible.
All in all, investors should be reviewing the details of any presented deal with a discerning eye and ask any and all questions that come to mind until they feel comfortable with the information presented and confident that they are ready to move forward.
Now that you fully understand equity multiples, you can approach the next deal with confidence around that term.
Recent Posts
Archives
- September 2022 (4)
- August 2022 (4)
- July 2022 (4)
- June 2022 (3)
- January 2022 (2)
- December 2021 (11)
- November 2021 (23)
- October 2021 (49)
- September 2021 (2)
- July 2021 (1)
- June 2021 (6)
- May 2021 (4)
- April 2021 (3)
- March 2021 (2)
- February 2021 (2)
- January 2021 (2)
- May 2018 (2)
- March 2018 (1)
- December 2017 (2)
- October 2017 (1)
- July 2017 (1)
- February 2017 (2)
- December 2016 (2)
- September 2016 (1)
Categories
- accredited investor (6)
- accredited investors (1)
- apartments (3)
- Atlanta (3)
- Ben Carter (1)
- Business Market (2)
- cash flow (2)
- class A real estate definition (1)
- commercial real estate (9)
- Commercial Real Estate Investing (98)
- crowdfunding real estate (1)
- how to invest in multifamily real estate (4)
- how to start investing in multifamily real estate (1)
- invest in multifamily real estate (4)
- Multifamily housing investment (1)
- multifamily real estate (3)
- multifamily real estate investing (2)
- Multifamily real estate terms (1)
- New Deal (1)
- News (10)
- Newsletter (9)
- People Planet Profit (1)
- Press Release (1)
- real estate fund (4)
- real estate fund investing (1)
- real estate funds (3)
- real estate investing (48)
- real estate investment fund (1)
- real estate investment funds (1)
- Real estate syndication (2)
- Real estate underwriting (1)
- Securities and Exchange Commission (SEC) (1)
- Socials Network (1)
- Syndication real estate (2)
- Team Work (2)
- Uncategorized (8)
- What is a real estate fund (1)
- what is a syndication in real estate (1)
- what is real estate syndication (1)
- What is underwriting in real estate (1)
- why invest in multifamily real estate (1)