Today's #CRE term spotlight: Equity Multiple. It's a less common measure but an important counter to the typical IRR standard used in many real estate transactions. Let's dive in! #realestateinvesting
The Equity Multiple represents the gross return an investor receives compared to their initial investment, regardless of time. It's a simple way to gauge overall returns based on the total distributions received relative to capital invested.
Example: An investor seeking a minimum equity multiple of 1.50x on a $1,000,000 investment would require a return of $1,500,000. This indicates that for every dollar invested, they expect to get $1.50 back in gross returns. So why is this used?
The equity multiple is often a complement to an IRR. IRR factors in the timing of returns, but not the total returns, meaning a quick flip of a project could result in a really high IRR, but a low total return, which isn't a worthwhile investment for many allocators.
In summary, the Equity Multiple measures the total return received by an investor regardless of time and is used as a complement or alternative to the IRR to ensure an adequate total return on the investment.
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