Equity Multiples and How They Impact Passive Investors

Post 31

by Joe Firmin                              2 ½ Minute Read

Any time a potential investor is reviewing a real estate syndication investment opportunity, 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 even 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 fancy, confusing or even daunting if no one’s ever explained what it exactly means.

Alternately, many investors have shared that, after they grasp the concept of equity multiples, they are able to more confidently compare projected returns and make wiser investment decisions. Cool huh? Let's dive in.

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 (money or original investment) by the end of that 5 year period.

The equity multiple is the total of the cash flow distributions plus the returns after the sale of the asset. There you have it. Now hold that thought...

A Little Math to Help Demonstrate 

Let's explore an example deal with a 2x equity multiple?

The investment (capital/money; also referred to as equity) is $100,000 and this deal has a projected annual rate of return of 8% with a 5 year period we'll hold the property before selling it. 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. 2x = 200%. Boom.

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 True Freedom 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.

If you’re interested in learning more about investing in value-add investments and becoming a passive real estate investor in real estate syndications, consider joining the Freedom Network. It’s absolutely free to join with no commitment necessary, seriously. If you don’t join, we won’t be able to send you opportunities (sorry, SEC rules). So join today!

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top