There are many ways to measure the return of an investment. Cash on cash return, average annual return, IRR, yield, among others. One common way to measure the projected return of a real estate syndication investment is through a metric known as “Equity Multiple”.
Equity Multiple (EM) is generally expressed as a “[number]x”, like 1.8x or 2.0x. The number is essentially an expression of the multiplier you can apply to the initial capital investment in a syndication to understand your projected return at the end of the hold period of the investment. Since investment performance is not precisely known at the start of a syndication, you’ll often see an Equity Multiple expressed as a range, like EM = 1.9x to 2.1x.
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To use some actual numbers, since that’s generally how I learn best, if you invest $100,000 into a real estate syndication with a projected hold period of 5 years and the projected Equity Multiple is 2.0x, then the projected amount you would receive at the end of the hold period is $200,000. This is because your initial investment of $100,000 (initial capital) times a 2.0 Equity Multiple is $200,000.
However, this does not mean you’re getting a total return of $200,000 PLUS the initial investment of $100,000. Equity Multiple is a projection of how much total you would receive at the end of the hold period. In this example, your initial capital of $100,000 is returned to you along with an additional $100,000 from the performance of the investment. In this example, you doubled your money by investing in a syndication that had a projected Equity Multiple of 2.0x.
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This is a bit more of a straightforward way of understanding a projected return as it is a bit simpler to do the math in your head versus trying to figure out what the return would be for a specific IRR across a 5-year hold period.
While it’s not the only metric you should review when you’re looking at an investment offering, Equity Multiple is a great metric to help with quickly understanding the projected return on an investment.
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