Whenever an investor is reviewing a real estate syndication investment opportunity, it’s likely they’ll come across the terms equity multiple and total return. Even if they’ve purchased a home or a residential rental property before, they probably haven’t heard of an equity multiple. However, it’s an important phrase to know and understand for real estate syndications.
Whether you’re a new real estate investor or a seasoned pro, it’s important to know what you’re getting yourself into. Part of that awareness comes from understanding the metrics presented in the investment summary before agreeing to invest in the deal.
As newer passive investors review potential real estate syndication deals, the terms equity multiple and total return might seem confusing if they haven’t heard them explained before.
Alternately, investors we know have told us that after they grasp these concepts, they’re able to more confidently compare the projected returns for different deals.
Defining “Equity Multiple” and
The initial amount someone invests into a deal is referred to as their capital.
That capital equals the amount of equity a passive investor has in the deal. Therefore, the term equity multiple simply means the amount your capital (or equity) will be multiplied by the end of the deal. It may also be expressed using
the term total return.
If a real estate syndication deal has a projected hold time of 5 years and an equity multiple of 2x, it means investors can expect to double their capital (original investment) during that 5-year period. It’s the same as saying the deal has a projected total return of 100%.
The equity multiple is the total of the deal’s cash flow distributions plus the
return from the sale of the asset (including the return of the investors’ capital).
By contrast, total return is the percent return of the deal’s cash flow distributions plus the return from the sale of the asset, not including the return of the
A Little Demonstration
Let’s explore an example deal with a 2x equity multiple, or 100% total return.
The investment capital (i.e., equity) is $100,000 and the deal has a projected average annual rate of return of 8% with an expected holding period of 5 years. This means the investor should expect to receive about $8,000 per year in cash flow distributions for 5 years – or a total of $40,000 over 5 years. When the asset is sold, investors will receive their initial $100,000 back, plus roughly another $60,000 in profit.
When the $40,000 in cash flow distributions and the $60,000 from the sale are added, that’s $100,000 in total returns. The investor began with $100,000, and not only got that back, but also earned an additional $100,000.
In this example, the investor has doubled their money, which is what it means to have an equity multiple of 2x, or a total return of 100%.
Related article: Exploring Projected Returns in a Real Estate Syndication
How Passive Investors Can Look at Equity Multiples and Total Return
In real estate syndication deals, it’s actually quite reasonable to expect to double your investment over the course of 5 years, but that doesn’t mean these deals are easily found. Here at BluSky Equity Partners, we aim to present our investors
with at least a 1.75x equity multiplier (75% total return) over a 5-year
Remember, the equity multiple – just like any other return or rate, is projected. That means it’s estimated using formulas and the expectations of the market, 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 thought possible. We make conservative projections, so the actual returns are likely to be higher than our projections; however, there’s no way to know for certain before-hand.
In summary, investors should be reviewing the details of any deal with a discerning eye and asking every question that comes to mind until they feel comfortable with the information and confident they’re ready to move forward.
Now that you fully understand the terms equity multiple and total return, you can evaluate the next deal offerings you receive with greater confidence.
Related article: How to Review a New Investment Opportunity in Less than 10 Minutes