Equity Multiples and What They Mean for Investors:

When reviewing real estate syndication investment opportunities, potential investors often encounter the term “equity multiple.” Even if you’ve purchased a primary home or a residential rental property before, you may not be familiar with equity multiples. However, understanding this term is crucial when it comes to passively investing in real estate syndications.

What “Equity Multiple” Means for Investors Interested in Real Estate Syndications:

As a new or seasoned real estate investor, it’s important to know what you’re getting into. Part of that awareness comes from understanding the metrics presented in the investment summary before agreeing to a deal. The term “equity multiple” might seem confusing or daunting if no one’s ever explained what exactly it means.

Defining “Equity Multiple”

The initial amount invested in a deal is your capital, which equals the amount of equity you have in the passive investment. Thus, the term “Equity Multiple” simply means the amount your capital (or equity) will be multiplied by the end of the deal. 

For example, if a real estate syndication deal has an equity multiple of 1.5x and a projected hold time of 5 years, investors can expect to increase their capital (original investment) by 1.5 times in that period. The equity multiple includes the total cash flow distributions plus the returns after the sale of the asset.

A Little Math to Help Demonstrate

Let’s explore an example deal with a 1.5x equity multiple:

• Investment (Capital/Equity): $100,000
• Projected Annual Rate of Return: 7%
• Hold Period: 5 years

This means the investor may receive about $7,000 per year for 5 years. Over this period, the investor will have received a total of $35,000 in cash flow distributions. Then, when the asset is sold, the investor receives their initial $100,000 back, plus another $15,000 in profit from the sale.

When the $35,000 in cash flow distributions and the $15,000 from the sale are added up, that’s $50,000 in total returns. The investor started with $100,000 and ended up with $150,000, illustrating an equity multiple of 1.5x.

How Passive Investors Might Look at Equity Multiples

In real estate syndication deals, it’s reasonable to aim for a 1.5x multiple over 5 years, though these deals aren’t always easy to find. At BlueDoor Equity, we aim to present a conservative 1.5x multiple to our investors over a 5-year hold period. Given the current economic climate and higher interest rates, achieving higher multiples can be challenging, making the 1.5x target a more realistic and prudent goal.

Remember, the equity multiple, like any projected return or rate, is an estimate. It’s calculated using formulas, algorithms, and market expectations, and it’s not guaranteed. The actual returns may be below the projections shown on the investment summary, or they may far exceed what was anticipated.

Investors should review the details of any presented deal with a discerning eye and ask all relevant questions until they feel comfortable with the information presented and confident in moving forward.

Conclude

Now that you fully understand equity multiples, you can approach the next deal with confidence and make more informed investment decisions.