Equity Multiples And What They Mean For Passive Investors

When you’re reviewing potential real estate syndication investment opportunities, you’ll likely come across the term “equity multiple.” It’s a term that you won’t see when you’re buying a primary home, or even when you invest in rental properties.

But when you’re investing passively in syndications, it can be a very important metric to look at and to understand.

In the video below, we’ll cover exactly what an equity multiple is, how it’s calculated, and what it means for you as a passive investor.

Video Transcript

If you’ve ever considered investing passively in a real estate syndication, you might have come across the term “equity multiple.” Today, we’ll go over exactly what an equity multiple means for you as a passive investor.

By the end of this video, you’ll have the tools you need to review potential real estate syndication deals with more confidence.

One of our investors shared with us that, after she had a grasp on what an equity multiple was, she was able to more confidently compare projected returns across potential investment opportunities and make wiser investment decisions.

Okay, let’s get started. The term “equity multiple” is actually exactly what it sounds like. It’s the amount that your capital, or your equity, will be multiplied over the course of the projected hold time.

So, if a real estate syndication deal had an equity multiple of 2x over a projected hold time of 5 years, that means that you could expect to double your money during that 5 years.

The equity multiple takes into account both the cash flow distributions throughout the project, as well as the returns on the back end when the asset is sold.

For example, let’s go back to the deal with the 2x equity multiple. Let’s say you were to invest $100,000 into this deal.

Let’s say that this deal has a projected annual return of 8%. That means that you would get about $8,000 per year for 5 years. In other words, you would get about $40,000 in cash flow distributions over those 5 years.

Then, when the asset is sold, you would get your original $100,000 back, plus another, say, $60,000 in profit.

When you take the $40,000 from the cash flow distributions, plus the $60,000 from the sale, you get $100,000 in total returns. So you started with $100,000, and you end with $200,000.

That’s what it means to have an equity multiple of 2x. You’ve increased your original investment by a factor of 2. In other words, you’ve doubled your money.

Okay, if this is making sense to you, comment below with “2x” so I can see that you’re still with me.

So, now you know that an equity multiple of 2x means that you would double your money during the span of the project.

In the deals that we do, that’s what we typically aim for, is we aim for about a 2x equity multiple over 5 years.

The important thing to keep in mind is that the equity multiple, just like any projected returns, is projected. That means that the actual returns might not hit that, or they could far exceed that number.

So, now you know what an equity multiple is and what it means for you as a passive real estate investor. But how do you know how it fits in with the rest of the projections you see in the investment summary for a potential real estate syndication deal?

For a walkthrough of a mock deal, be sure to check out our Anatomy of an Investment Summary article.

You’ll find information about the equity multiple, internal rate of return, and other important information for passive investors to know. You can find the link down below in the description.

And finally, if you liked this video, hit the like button below, share it with your friends, and be sure to subscribe.

I’m Annie Dickerson with Goodegg Investments. Thank you for watching, and I hope you have a sunny-side-up day.

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