In the world of investing, there are a multitude of confusing phrases and acronyms. Most of these are simply fancy words for simple ideas, and “investor equity multiple” is no different.
Traditionally, the definition of equity in real estate is how much money you would have if you sold your house today and paid off any remaining loans. For example, say you bought a house for $100,000 and after a few years you owe $50,000 on the mortgage. Assuming the market has appreciated and the property is now worth $200,000, if you sold it you’d have to pay the remaining mortgage balance of $50,000 and would be left with $150,000. In this case, the $150,000 is your equity in the home.
What Are Equity Multiples?
Investor equity multiple is a term used by real estate investors to talk about their profits on a specific property. This is especially prevalent with commercial real estate companies like First National Realty Partners (FNRP reviews are plentiful, if you want to know more). Basically, as large investors purchase gigantic properties, they want to know where every cent is going and how much money they are making. Equity multiple helps them understand this.
Investor equity multiple is a measure of the total amount invested in a property versus how much profit it has generated. For simplicity’s sake, let’s say that you purchased a shopping mall like Pennsylvania Real Estate Investment Trust did as part of their primary investment strategy. Say you purchased the mall for $10 million and, through an unbelievable stroke of luck, one day later you sold the property for $15 million–lucky you!
$15 million is 1.5 times $10 million. This means the investor equity multiple is 1.5. Another way to look at this is you earned a 50% profit.
It’s Not Quite That Simple
Real estate would be easy to understand if the above scenario is how all transactions played out. In reality, it is far different. There are factors on both sides of the equity multiple equation that need to be factored into the final calculation.
Selling a property for a profit isn’t the only way to make money in real estate. Rental income is included in the total amount earned on an investment. Over a period of several years, the amount earned may eclipse the original investment. The total rental income earned is added to any profits made via the sale of the property.
Taxes and Insurance
Taxes and insurance may not seem like much, but over several years they can add up to serious money. The total of all property taxes and insurance payments made will be added to the money spent column as part of the total amount invested.
Many investors are unable to purchase a property outright for cash. This is also true for larger commercial real estate companies—they need to take out a mortgage just like the rest of us. The total down payment made, plus any mortgage interest paid, must be included in the money spent column.
Any maintenance payments that had to be made must also be included in the total amount invested.
Add It All Up
After many years of owning a property, the owner or investors will inevitably sell. Add up the total amount spent over the years on the property (including down payments), mortgage interest, maintenance, taxes, and insurance. Then, add up the sale price plus any rent earned over the years.
If the total amount invested in a property is $1 million and you’ve sold the property for $2 million plus $500,000 in rental income ($2.5 million), your investor equity multiple is 2.5.
Real estate is a complicated field filled with acronyms and jargon. Hopefully, understanding investor equity multiple brings you one step closer to fulfilling your real estate aspirations!