An equity multiple answers one question: for every dollar you put into a deal, how many come back out? Divide everything the deal pays you, including what is left after the sale, by the cash you invested.
A multiple of 1.0 means you got your money back and nothing more. A multiple of 2.0 means you doubled it. The number includes your own capital, which is why it is never the same as a profit figure, and why 1.0 is the line between a return and a loss rather than zero.
How do you calculate an equity multiple?
Total cash distributions plus net sale proceeds, divided by total cash invested.
Take the fourplex the multifamily calculator opens on: $499,000 for four units renting at $1,575 a month, 20% down on a $399,200 loan over thirty years at 7%, and 3% closing costs. The cash invested is $99,800 of down payment plus $14,970 of closing costs, so $114,770.
Hold it ten years. The projection grows rents 2% a year, expenses 2%, and the property’s value 3%, and sells at the end with 7% selling costs. Those are the example’s assumptions, not a forecast.
| Over ten years | |
|---|---|
| Cash flow kept, years 1 to 10 | $141,795 |
| Sale price in year 10 | $670,614 |
| Selling costs (7%) | −$46,943 |
| Loan balance paid off | −$342,563 |
| Cash back on $114,770 invested | $422,903 |
These are example figures, not a forecast for any market.
$422,903 divided by $114,770 is 3.68. Every dollar in came back as $3.68, of which $2.68 is profit.
Notice where most of it came from. The ten years of rent produced $141,795, and the sale produced $281,108 after costs and the loan payoff. Two thirds of the multiple is the sale, and the sale rests on a 3% appreciation assumption and on the loan having been paid down from $399,200 to $342,563 by tenants.
What is a good equity multiple?
There is no standard, because the number has no clock in it. A 2.0 earned in three years and a 2.0 earned in twenty are the same multiple and are not remotely the same deal.
So an equity multiple only means something next to a holding period. Here is the same building, same assumptions, held three different lengths.
| Cash back | Equity multiple | Annual return (IRR) | |
|---|---|---|---|
| Held 5 years | $221,719 | 1.93× | 16.1% |
| Held 10 years | $422,903 | 3.68× | 17.6% |
| Held 30 years | $1,876,431 | 16.35× | 15.6% |
The thirty-year row is the one worth staring at. Its multiple is more than four times the ten-year multiple, and its annual return is lower. Holding longer almost always raises the multiple, because rent keeps arriving and the loan keeps shrinking. It does not follow that holding longer raises the return.
Equity multiple vs IRR: which one answers the question?
The multiple tells you how much. The IRR tells you how fast.
IRR, or internal rate of return, is the yearly rate that makes a deal’s cash flows add up to what you paid, so it charges a deal for every year it holds your money. This rental’s 17.5% IRR over ten years walks through that calculation on a single-family house.
Run them together and each covers the other’s blind spot. The five-year hold here has a 16.1% IRR, close to the ten-year hold’s 17.6%, and returns less than half as much cash. The thirty-year hold returns 16.35 times the money at a lower annual rate than either. Neither number is wrong. They are answers to different questions, and a deal described with only one of them is half described.
One more gap both share: they treat the sale as a fact. Change the appreciation assumption from 3% to 1% and the ten-year multiple falls, because the whole sale half of the answer moves. The cash flow half does not.
What does an equity multiple leave out?
Four things, all of which matter on a real building.
- Time, as above. The multiple is the only common return measure with no period in it.
- Taxes. The projection here is pre-tax. Depreciation shelters some of the rent, and the sale brings back depreciation recapture and capital gains, so the after-tax multiple is lower than 3.68 for most owners. That is a question for a tax professional, not a calculator.
- Money you add later. A new roof in year six is more cash invested, and it belongs in the denominator. Any multiple quoted off the original down payment alone is flattering itself.
- Whether the income was real. A multiple built on a rent roll nobody verified is arithmetic on a guess. Reading a rent roll shows how far a stated $7,290 a month can sit from what is actually collected.
How do you work out the multiple on your own deal?
Add up three numbers and divide.
- Cash in. Down payment, closing costs, and any rehab or capital spending you fund yourself.
- Cash out while you hold it. Annual cash flow after the mortgage, for each year of the hold. The calculator gives you the first year; grow it by your own rent and expense assumptions for the rest.
- Cash out at the sale. Sale price, less selling costs, less whatever is still owed.
Then divide the sum of 2 and 3 by 1, and write the holding period next to the answer. Without the period, the number is decoration.
The same building can be made to look better by holding it longer and worse by selling early, with nothing about the property changing. If you want to see which lever is doing the work, change the rent in the fourplex example and watch the cash flow half move while the sale half stays put. Raising the rent moves both halves at once, which is why $150 more a unit shows up in the cash flow and in the price a buyer will pay.