Equity Multiple for Passive Investors

Equity Multiple For Passive Investors

Have you ever wondered what is the best way to determine if an investment is worth your time and money?

This can be one of the limiting factors for many passive investors getting into deals. But I’m here to tell you that there is a way. The answer lies in one of the most important and fundamental metrics used in multifamily investing: the equity multiple.

As an investor, it’s crucial to understand the difference between equity multiple and other terms like cash on cash return, so that you can make the most profitable investment.

Let’s dive in: what is the equity multiple?

Equity Multiple for Passive Investors


What is the Equity Multiple For Passive Investors?

The equity multiple is a way to calculate the total return based upon the investor's initial investment.

It’s calculated by dividing the total cash distributed to investors by the total cash invested. The result is expressed as a multiple, with 1 representing a break-even investment.

A multiple greater than 1 indicates a positive return on investment, while a multiple less than 1 indicates a negative return. Another way of explaining this is for every $100,000 that you've invested, a 2X multiple means you'll get back another hundred thousand dollars, for a total of $200,000.

Basically, for every dollar you put in, you'll see two dollars. That's what the equity multiple is.

Syndicators can make predictions on what the equity multiple will be for their investors. For example, look at this deal we did at Nighthawk: 

Treehaven Glen

  • Huntsville, Alabama
  • 71 Units
  • Date Purchased: Aug, 2018
  • Capital Invested: $647.5K
  • Projected Hold Period: 5 years
  • Actual Hold Period: 2.5 years
  • Projected Equity Multiple: 1.52x
  • Actual Equity Multiple: 1.5x
  • Projected IRR: 14.2%
  • Actual IRR: 15%


We projected an equity multiple of 1.52X and when we sold the property, the actual number was 1.5X. If you invested $50K in this deal, you would’ve gotten $75K out.

This is a somewhat predictable metric we can provide to investors like you so that you can make the most out of your money.

But another, more popular metric out there is cash on cash return. What’s the difference between the two and why use two different metrics?


Equity Multiple For Passive Investors

Cash on Cash Return vs. Equity Multiple 

Both metrics are very important and they’re both quite different. In order to understand the difference, you have to know what cash on cash return is.

The simplest way to define it is for every dollar you put in, how many pennies do you expect to get each year?

Cash on cash return is a more basic and short term metric, generally used by less experienced investors. It's a great metric to use when evaluating the property's cash flow, but it doesn't provide any insight into the property's overall performance over time.

On the other hand, equity multiple is a more advanced metric that measures the overall performance of the property over time, taking into account all cash distributions to the investors and appreciation of the property.


Equity Multiple for Passive Investors


How to Use the Equity Multiple When Making Decisions 

Both equity multiple and cash on cash return are important metrics for you to consider when evaluating potential investments.

However, they measure different aspects of a property‘s performance and should be used in conjunction with each other for a more complete picture of the investment's potential.

Equity multiple includes not just the duration of the hold, but also money that you're getting at the end; it’s more of a comprehensive number.

But cash on cash is important because it tells you what the investor should expect to get in their pocket while their money is being invested.

You can use this metric to make decisions by taking a look at what the projected equity multiple is for a particular property. Take these deals, for example: Nighthawk Portfolio.

We aim to make accurate and reachable projections so that you know the return on your investment. 

As always thanks for reading. If you want to learn a little bit more about the important metrics for evaluating different syndication deals, please schedule a call by visiting us at nighthawkequity.com/join

I’m looking forward to speaking with you and thanks for tuning in.


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