What is an Equity Multiple?
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Let's break down one of the most fundamental metrics of multifamily investing –
The Equity Multiple.
What does this term mean?
The equity multiple is simply a way to calculate the total return based on the investor's initial investment.
The calculation is your total return divided by the investment. For instance, Equity Multiple 2X means that for every $100,000 that you've invested, you'll get back another $100,000 for a total of $200,000.
To say it simply, for every dollar you put in, you'll see $2. That's what an Equity Multiple means.
Another very popular metric out there is Cash on Cash Return and you may be wondering, what's the difference between the two? And why use two different metrics?
The answer is, they're both important and they're quite different.
The Cash on Cash Return shows how many pennies you expect to get each year for every dollar you put in. It measures the cash flow during the duration of the whole, whereas the Equity Multiple also includes the appreciation of the property. The Cash on Cash Return doesn't include if the property is going up in value, but the Equity Multiple does.
The Equity Multiple includes not just the duration of the whole, but also money that you're getting at the end and your money back. It's a little bit more of a comprehensive number.
The Cash and Cash is important because it tells you what should the investor expect to get in their pocket while their money is being invested.
These are two different metrics to add to your investing toolbox, and both very valuable.