What is an Equity Multiple in Real Estate?
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Real estate is a powerful vehicle for investors who want to diversify their investment portfolio and enjoy consistent returns. Residential and commercial real estate both have the potential to provide these benefits. But investors need to understand how to compare potential investment opportunities effectively. However, this is a lot easier said than done.
It takes a lot of skill, experience, and knowledge to properly assess prospective investments. Even with those qualities, there is no guarantee that an investment will pay off. You always have to deal with a bit of risk no matter what type of investment you are getting into.
Experienced investors know how to use different methods to assess investment opportunities. Equity multiple is one of these methods. Just like Internal Rate of Return, it is considered one of the most efficient ways to analyze and compare specific securities, particularly real estate investments.
Here we will discuss equity multiple in commercial real estate, what a good equity multiple looks like, and how to evaluate real estate investments using this metric.
Understanding the Equity Multiplier in Real Estate
The equity multiplier is a risk indicator. It is used to measure the portion of a company’s assets that is financed by the stockholder’s equity instead of debt. Having a high equity multiplier means that a company is using a high amount of debt to finance its assets. On the flip side, a low equity multiplier means that a company relies less on debt. [1]
It is worth noting that a company’s equity multiplier can only be judged as being high or low based on historical standards, the company’s peers, or the industry averages.
The Equity Multiple Formula
The formula for equity multiplier calculation is as follows:
Equity Multiplier = Average Total Assets / Average Total Shareholders’ Equity
If you want to calculate the equity multiplier, you simply divide the company’s total asset balance by its total shareholder’s equity. [2]
If a company has a 2x equity multiplier, this means that financing is split equally between debt and equity.
In the world of real estate investing, this is a metric that can calculate the expected total return on an investment. In this context, it is calculated by dividing the total dollars received by the total dollar invested.
The equity multiple is also defined as the total cash distributions received from an investment, divided by the total equity invested. So it basically shows how much an investor can earn from their initial investment based on cash flow distributions and total equity invested.
Here is the formula for equity multiple in real estate investing:
Equity Multiple = Total Distributions / Total Invested Capital
For example, if we were to calculate an investment’s equity multiple based on the assumption that the investor purchased the property for $100,000 and that property is sold for $200,000, then the deal delivers a 2x equity multiple. If the investor just gets $150,000 in return, the deal delivers a 1.5x equity multiple. [3]
Generally speaking, an equity multiple greater than 1.0x means that the investor is getting back more cash than they invested. So if the calculated equity multiple is 2.50x, it means your expected returns is around $2.50 for every $1 you invested into a real estate project.
If you know how to calculate equity multiple, you can make more informed investment decisions in real estate, and this would come in handy as you look into more and more properties.
How Do Investors Interpret the Equity Multiplier?
Equity multiple calculation is important, but how do investors use it? A higher equity multiple in commercial real estate and residential real estate means that the investor can potentially earn more.
However, do not be distracted by great equity multiples. While it is tempting to jump onto the first 2.5x deal you encounter, there are other factors you may want to consider. For example, a property that is bought for $100,000 and then sold for $300,000 50 years later will have an equity multiple of 3x. But investors may also find much better investment opportunities for their $100,000 over that same 50 year period. In this case, the high equity multiple may attract your attention, but it does not paint the whole picture. [3]
With that in mind, equity multiple remains an effective way to judge the kind of return you can expect on an investment property. It is highly recommended that the investor uses this metric as part of their due diligence rather than relying on it entirely.
Investors should be careful around low quality properties that have a high equity multiple despite being in tertiary locations or having risky financing. Equity multiple does not adequately account for risk. Consider the risks before investing in these properties. While they may have attractive upside potential, they can be risky even with a high equity multiple.
By pairing equity multiple with risk analysis, investors may be able to identify the best properties for their personal investment criteria.
The Best Real Estate Investment for Accredited Investors: Multifamily Syndication
Real estate investors have to do a lot of due diligence in order to make sure that their investments have the best chances of achieving their financial and investment goals. But some investments take a lot less work: real estate syndication comes to mind.
While you still have to do your due diligence when it comes to researching real estate syndication deals, joining one is actually a much less stressful endeavor since it is a passive investment. Normally, purchasing a real estate property is difficult because then you have to take care of it and make sure it becomes profitable. But with a syndication deal, investors may enjoy all the benefits of owning real estate without the usual headaches associated with it.
A real estate syndication is when multiple investors pool their resources together to buy a single real estate property. There is a syndicator who acts as the general partner and locates the investment property. They then put the deal together, secure the financing, and look for accredited investors who will provide most of the capital needed for the property. [4]
These investors become passive investors in the syndication deal. Depending on the specific deal structure, they may earn from the equity upon resale as well as the monthly cash flow distributions from rental income.
While syndication deals can be made for most types of real estate, multifamily properties are the most popular since these large buildings are harder to obtain for the lone investor. There is a large financial hurdle for anyone trying to buy an apartment complex all by themselves. But with multifamily syndication, investors get to pool their money together and acquire the property with a much smaller capital. [4]
Multifamily syndication is a great alternative to becoming a landlord and managing a property all by yourself. With a syndicator, you no longer have to deal with tenants or handle emergencies because they will be in charge of property management as well. This means real estate investors can just sit back and let their money work for them.
A syndication deal offers plenty of benefits, especially multifamily syndication deals. Apartment complexes and condominiums are able to generate a strong and consistent cash flow. They also worry less about vacancies since there are multiple units to be filled up. Unlike single family homes, multifamily properties can still generate a profit even if one or more units become vacant. Your cash flow is not interrupted by your tenants leaving.
If the property is well-located and well-maintained, these vacant units are going to be filled up in no time. And for investors who are working with BAM Capital, these syndication properties are sure to be well-maintained.
Overall, syndication deals are a great source of passive income for accredited investors. Most of these deals are only available to accredited investors. But if you are qualified, this is an amazing investment opportunity that allows you to participate in real estate investing without managing an entire building by yourself.
Why Work with BAM Capital for Multifamily Real Estate Syndication
Real estate investors looking into multifamily syndication should work with BAM Capital. This is a reliable Indianapolis-based real estate syndicator that is known for its consistent track record and strong Midwest focus.
BAM Capital prioritizes Class A, A-, and B++ multifamily assets with in-place cash flow and proven upside potential. This syndicator covers all the steps of the investment life cycle. Because they are vertically integrated, they are able to handle everything from purchasing to remodeling to property management. They are also known for their award-winning multifamily investment strategy that creates forced appreciation. BAM Capital will negotiate the purchasing and financing of high quality multifamily properties on your behalf. [5]
BAM Capital’s strategy mitigates investor risk and allows the fund to target a consistent monthly cash flow. In fact, it now has $700 million AUM and 5,000+ units. [5]
No investment is without risk. Make sure to consult your investment advisor or speak to a BAM Capital investment team member before making any financial decisions.
Accredited investors can schedule a call with BAM Capital and invest today.
BAM Multifamily Growth & Income Fund III
BAM Capital created this fund in order to yield consistent and reliable cash flow, long-term appreciation, and accelerated tax benefits. The fund aligns with BAM Capital’s demonstrated track record of successful multifamily investing by continuing to implement our signature investment thesis, now in fund format. The fund aims for greater overall returns and lower risk through a multi-asset diversification strategy.
- Consistent passive income
Lower-risk assets with in-place cash flows with the ability to distribute preferred return after acquisition.
- Significant tax benefits
A cost segregation analysis allows for accelerated deprecation to years of ownership. This large passive loss gets passed onto investors through a K1.
- Vertically integrated company
In-house property management and construction allow for predictable cost reduction and value add.
Sources:
[1]: https://www.investopedia.com/terms/e/equitymultiplier.asp
[2]: https://www.wallstreetprep.com/knowledge/equity-multiplier/
[3]: https://cadre.com/insights/how-to-use-equity-multiple-to-evaluate-real-estate-investments/
[4]: https://www.masterclass.com/articles/syndication-deal-explained
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source https://capital.thebamcompanies.com/2023/01/equity-multiple-real-estate/
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