• Skip to main content
  • Skip to primary sidebar

Cade Hildreth

Everything You SHOULD'VE Been Taught in School.

MENUMENU
  • Blog
  • Real Estate
  • Finance
    • Investing
    • Increasing Income
    • Real Estate
    • Cryptocurrency
    • Gold and Silver
    • Financial Q&A
  • Health
    • Fitness
    • Nutrition
    • Confidence
    • LGBTQ+
  • Podcast
    • "What You Should've Been Taught"
    • Audio Feed of the Website
    • Ask a Podcast Question
  • About
    • Testimonials
    • About Cade
    • Rugby Bio
    • Instagram
    • Contact
You are here: Home / Finance / What Is an Equity Multiple and How Do You Calculate It?
What Is an Equity Multiple and How Do You Calculate It?

What Is an Equity Multiple and How Do You Calculate It?

January 1, 2024 By Cade Hildreth Leave a Comment

With all its terminology, stepping into the world of investing can be daunting. Nonetheless, an important concept to understand is the equity multiple.

But what is an equity multiple and how can you use it to evaluate the strength of an opportunity?

Also, when and why would you use it over other key performance metrics? Keep reading to learn these answers below.

What Is an Equity Multiple?

For those still scratching their heads about what equity multiple is, let’s try to put it simply.

It a term that describes how much of a profit—or a loss—you expect to make on your money. Meaning, if you put $1 into a deal, how much can you expect to get back? If you get back $2 for every $1 you that invest, that would be an equity multiple of 2.

More specifically, an equity multiple is the total cash distributions received from an investment divided by the total equity invested into that investment.

Thus, an equity multiples measure the total cash return on an asset over the investment’s lifespan.

The equation is:

  • Equity Multiple = Total Cash Distributions / Total Equity Invested

While this might seem similar to return on investment (ROI), equity multiple is a ratio rather than a percentage.

Most often, an equity multiple is used to evaluate real estate investment opportunities. However, it can be used to evaluate any type of investment in which you are investing money with the intent to make a profit. For example, you could use it to evaluate a business that you are considering buying.

Many times, it is used to make projections before you invest. Obviously, you would use using estimated figures in this case. Other times, it is used  to calculate the performance of an investment once it is complete. In this case, you would be using concrete figures.

What Does an Equity Multiple Mean?

When you calculate an equity multiple, you want it to be above 1.0. This is because the ratio indicates the return you have earned on each dollar that you spent. Thus, an equity multiple of:

  • Less than 1.0 means you’re losing money
  • Equal to 1.0 means you’re breaking even
  • Greater than 1.0 means you’re making money

For example, if your ratio is 2.0, you will make $2 on every $1 you invested into the property over its lifespan. That is a doubling of your initial funds.

It’s important to note that a equity multiple of 2.0 means that you got your initial $1 investment back, plus a profit of $1.

How to Calculate Equity Multiple

Next, let’s discuss how to calculate an equity multiple on your investment properties.

The first information you’ll need to gather to calculate your equity multiple is the total money invested into the property. Next you will need to estimate the value at which you will sell the property and your expected cash flow along the way.

A Simple Example

First, let’s start with a simple example of how to calculate an equity multiple. Let’s say that you bought a single family home (SFH) for $200K in 2022 and sold it for $300K in 2027. In this case, your math would be:

Total Cash Distributions of ($300K) / Total Equity Invested ($200K) = An Equity Multiple of 1.5

The reason this example is so simple is that we don’t have to account for any cash flow along the way. We simply have our purchase price and we have our sales price, which produces an equity multiple of 1.5.

A More Advanced Example

Next, let’s do a slightly more complex example.  For this example, let’s assume that you invested $100K into a real estate syndication.

Over the course of the five years that you were invested in this opportunity, you were paid out $10K per year in cash flow ($50K total).

Let’s also assume that you received $150K when the assets you invested in were sold. That $150K would contain a return of your initial capital invested of $100K, plus a profit of $50K.

Thus, your total cash distributions would be $200K, produced from a combination of $50K in cash flow plus $150K from the sale of the real estate assets.

In this case, your math would look like this: 

Total Cash Distributions of $200K / Total Equity Invested of $100K = An Equity Multiple of 2.0

A More Complex Example

Finally, let’s do a slightly more complex example. Let’s say that as an investor, you purchased an apartment building for a total of $5 million around six years ago. The present valuation of the property is now $10 million. If that was the only way you made money from the deal, then your math would look like this:

$5 million (Total Equity Invested) / $10 million (Total Cash Distribution) = 2 (Equity Multiple)

But if you had rented out the property and made $200,000 annually for six years, then you’d also have to include $1.2 million in total cash distribution. In this case, your equation would look like this:

Total Cash Distributions of $11.2 million / Total Equity Invested of $5 million = An Equity Multiple of 2.24 

It’s important to note that equity multiples formulas can also include expenses and additional investments you might have to make over time to maintain your investment.

In this case, the expenses would reduce your total cash distributions, while additional investments would increase your total equity invested. Either way, these items can easily be accounted for in your calculations.

Problems with the Equity Multiple

While an equity multiple is an easy metric to understand, it is a limited metric, because it does not account for time. Obviously, it’d be way better to get an equity multiple of 2.0 over three years than to get that equity multiple of 2.0 over 10 years, because of the time value of money.

As we all know, a dollar today is worth more than a dollar a decade from now.

To get a better idea of the growth of your investments over specific spans of time, you will want to use a different metric instead. Good metrics for this purpose include Annual Recurring Revenue (ARR) or Internal Rate of Return (IRR).

An ARR is a formula that calculates the annual percentage rate of return expected from an investment compared to the initial cost, while an IRR lets you estimate the future profitability of potential investments.

Of those two metrics, the IRR does a better job of accounting for the time value of money.

We discuss these formulas in more detail in an article about the differences between the two.

Understanding the Equity Multiple

Working out your equity multiple can be confusing and getting it correct matters.

Put simply, an equity multiple will tell you how much money you can expect to earn from your investment. Having said that, it will not tell you how long it will take you to receive those earnings, which is its major drawback.

What questions do you have about the equity multiple? Ask them in comments below.

Want to stay in the loop? Join nearly two million other readers who are learning how to increase their income, invest in real estate, buy and sell crypto, and so much more.
Are we connected on social media? If not, let’s do it so I can share in your world too: Instagram | Twitter | Facebook | Pinterest | TikTok | LinkedIn | Podcast
5/5 - (2 votes)

Share this:

  • Click to share on X (Opens in new window) X
  • Click to share on Facebook (Opens in new window) Facebook
  • Click to share on LinkedIn (Opens in new window) LinkedIn

Filed Under: Finance Tagged With: real estate

Reader Interactions

Tell Us What You Think!Cancel reply

Primary Sidebar

  • Instagram
  • X
  • Facebook
  • LinkedIn
  • Pinterest
  • TikTok

“As an entrepreneur, real estate investor, and former USA Rugby Player, I’ll teach you what your parents and teachers should’ve taught you, but didn’t know themselves.” -Cade Hildreth

Ready to stay in touch? Subscribe here.

Or, listen to Cade’s articles on the go as a Podcast.

If you’re feeling sadness or anger or despair, a If you’re feeling sadness or anger or despair, ask yourself this question… 

If this messages resonated with you, please leave a ❤️ below because it’ll help the message reach more people, including those who might really need it… 🙏

#lgbtqia #lgbtqcommunity #trans
A few moments and miracles to balance the chaos ri A few moments and miracles to balance the chaos right now… 🤍

Also, two questions: 

1. Did I discover what you expected underneath the bed covers? Lol

2. Have you ever seen a Lunar Halo? They  are stunning and rare and are caused by tiny ice particles that act as a prism… 🌖🌙
Reminder: What you see on the surface often isn’ Reminder: What you see on the surface often isn’t what is being felt underneath. 💔

Erin and I are smiling in this photo, but only a few times in my life have I been so devastated, so heartbroken, so utterly and emotionally broken. 

When this photo was taken, we had recently had to say goodbye to our dearest, move beloved baby, Percy, who we had raised since adopting him at birth. He was our cherished companion, a therapy dog, and our beloved friend. 

The last photo was taken on our very last walk ever with him. 🐾👣🥺

This post is a reminder to be gentle with each other, because this human experience is extremely painful … and we’re all in it together. 🐶🌎❤️
Someone needs to tell Elon Musk that his hair tran Someone needs to tell Elon Musk that his hair transplant, hormone replacement therapy (supplemental testosterone), and cosmetic surgery (jawline) are all examples of gender-affirming care. 😂

This is his BEFORE and AFTER. 

Feel free to congratulate him on his transition below... ⬇️ 🎉🙌

#trans #transgender #genderexpression #genderidentity #genderfluid #nonbinary #mtf #ftm #lgbtqia #lgbtqiaplus
A flower blossoms for its own joy. —Oscar Wilde A flower blossoms for its own joy. —Oscar Wilde

As we approach January 20th, I believe our most important armor is joy. 

No one can take this simple and pure pleasure away with any legislation…or opinion…or action. 

In honor of this, what is one thing that brings you joy?
An incredible summary of your geographic options i An incredible summary of your geographic options if you’re inclined to move now or in the future. 🏳️‍🌈🏳️‍⚧️

It appreciate that it presents both domestic options, because some people will only need a minor state change to meet their needs while others may want greater change. 

Thanks @erininthemorning for compiling this and keeping our community informed!

Where are you currently living and do you feel safe with its (likely) protections and policies? 🌎

Let’s use our communal knowledge to help each other out… 🏡🩵

#lgbtqia #lgbtqiaplus #lgbtqcommunity #trans #nonbinary #transgender #queer
Follow on Instagram

Recent Posts

Master List of Real Estate Syndicators for 2025

How to make 6-figures

How to Make Six-Figures: 6 Skills You Can Teach Yourself

Salary negotiation tips

Salary Negotiation: How to Ask for More Money the Right Way

How to Invest with Very Little Money

13 Ways to Invest When You Have Very Little Money

Categories

  • Confidence
  • Cryptocurrency
  • Entrepreneurship
  • Exclude
  • Finance
  • Gender Series
  • Gold and Silver
  • Health
  • Increasing Income
  • Investing
  • LGBTQ+
  • Nutrition
  • Podcast
  • Real Estate

Ask a Podcast Question | Contact Us | Terms of Use | Privacy Policy

COPYRIGHT © 2019 · CADEHILDRETH.COM | PHONE: ‪(202) 660-4705‬  | 800 CORPORATE DRIVE, SUITE 301, STAFFORD, VA 22554, USA

 

*Disclaimer: Nothing on this site should be construed as medical, health, or financial advice. Before making any health decisions, you should consult with your doctor. Before making any financial decisions, you should consult with professional adviser, such as a financial planner or CPA.