The equity multiple is every dollar returned to the investor divided by every dollar he put in, across the whole hold: operating cash flow plus what is left after the sale pays off the loan and its costs. A multiple of 1.0 means the money came back and nothing else happened.
Equity multiple=Total cash returnedTotal cash invested
- Total cash returned
- Operating distributions over the hold plus net proceeds at sale, after the loan and sale costs are paid.
- Total cash invested
- Equity at purchase plus any capital called during the hold.
- It is time-blind. The same 1.22x over three years and over ten years are not the same investment, and the multiple cannot tell them apart.
- It is the honest counterweight to a projected return that depends on when money arrives rather than how much of it does.
- Most of the multiple in a leveraged hold comes from amortisation and the exit price, so both assumptions deserve the same scrutiny.
- Below 1.0 means capital was lost. It is the one reading nobody argues with.
The same purchase held five years and sold at the same 6.0% cap, with 2% sale costs and no rent growth assumed.
Every dollar came back with twenty-two cents on it, and most of that came from the loan being paid down, not from the building being worth more.
Related terms
All termsCash-on-Cash Return
Cash-on-cash return is the cash a property puts in the owner's pocket in a year, divided by the cash he actually put into it.
FinanceLeverage
Leverage is using borrowed money to control a larger asset than cash alone would buy.
InvestmentCap Rate (Capitalization Rate)
The capitalization rate is a building's net operating income divided by its price, expressed as a percentage.
Terms arrive with the writing.
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