Equity Multiple: The equity multiple is an important metric in real estate syndications, and it is exactly as it sounds. It is the amount that your initial investment, or your equity, will be multiplied over the course of the hold period. It is calculated by dividing the total cash distributions received from an investment by the total equity invested. For example, if a deal has a projected equity multiple of 2x, it means investors can anticipate doubling their capital (i.e. their original investment) over the course of the entire investment. The equity multiple includes distributions from cash flow plus the return from the sale of the asset as well the return of the investors’ original capital. The calculation is fairly simple and is shown below.

Equity Multiple = Total Cash Distributed / Capital Invested

Total Return: Total return is similar to equity multiple but has two distinct differences: 1 – it is expressed as a percentage, and 2 – it does not include the investors’ original capital. Total return is simply the sum of cash flow distributions plus the return from the sale of the asset, excluding the return of invested capital, divided by the capital invested. Simply put, it represents the percentage return on the investment. Calculating total return is also quite simple as shown in the equation below:

Total Return = (Total Cash Distributions – Capital Invested) / Capital Invested

If we use the first example with a 2x equity multiple, this would be the same as a total return of 100%.

An Example

Let’s illustrate these concepts with an example of something you might find in an investment offering. Assume we have an investment with a projected equity multiple of 1.9x and a projected average annual rate of return of 6%. [AL1] [AL2] If an investor invests $100,000, they can expect an average of $6,000 per year in cash flow distributions over 5 years, or $30,000. Upon the asset’s sale, the investor receives their initial $100,000 back, plus an additional profit of $60,000, resulting in a total profit of $90,000 ($30,000 + $90,000). Now let’s use the equations above to calculate equity multiple and total return.

Invested capital = $100,000

Cashflow distributions = $6,000 x 5 yrs. = $30,000

Distribution upon sale = $160,000

Total cash distributed = $190,000

Using the formulas above, we can calculate the equity multiple and total return as follows:

Equity Multiple = $190,000 / $100,000 = 1.9

Total Return = ($190,000 – $100,000) / $100,000 = 90%

In this scenario, the equity multiple is 1.9x, signifying that the investor will receive 1.9x the original investment, or a total return of 90%.

Evaluating Deals with Confidence

As a passive investor, understanding equity multiple and total return allows you to assess potential syndication deals more confidently. While it is reasonable to aim for a 1.75x equity multiple (75% total return) over a 5-year period, it is important to remember that these figures are only projections. As a passive investor it is important to understand the basis of those projections and determine if those projections are likely to be achieved or not. Most investors prefer to take a conservative approach and see their investments overperform rather than be overly aggressive and not meet projections. No one can foresee the future and the conditions that may be encountered. As an investor all you can do is educate yourself on the investment details and make the decisions that best meet your investing goals.

Beyond Equity Multiple – Considerations for Investors

While the equity multiple and total return are valuable metrics, they are not the only metrics to rely on when evaluating the potential return on your investment. Investors should also explore the Internal Rate of Return (IRR) to assess consistent cash distributions over the hold period and factor in the time value of money. Additionally, a higher equity multiple and higher total return may involve increased risk, and a balanced consideration of risks versus returns is important in making informed investment decisions.

Conclusion

Equity multiple and total return are two key metrics for real estate investors wanting to make well-informed decisions, but they are not the only factors to consider. As you explore potential syndication deals, dig into the details, ask questions, and remember that projected returns are just that – projections, they are not guaranteed. Hopefully with this knowledge, you can better evaluate investment opportunities with confidence and move forward in your real estate investment journey. 

Now that you’ve learned about these key metrics, what will you do next? If you haven’t yet joined the Ama X Equity investor club, what are you waiting for? By joining you will receive updates on our deals, gain access to educational materials, and stay up to date with new projects and economic insights.

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