How the Equity Multiple Works in Commercial Real Estate

seoserviceusa93 • November 5, 2018
How the Equity Multiple Works in Commercial Real Estate

Purchasing commercial real estate is completely different to buying a house for one main reason—the investment is sufficiently higher.

Buying commercial real estate requires the use of various metrics for investor analysis; one such metric is the Equity Multiple


What Does Equity Multiple Refer To In Commercial Real-Estate?

The equity multiple happens to be a crucial and effectual financial metric that is commonly used in commercial real estate. The purpose of the equity multiple is to compare the amount of cash that was invested to the amount of money that particular investment generated during a specified period of time.


How Is The Equity Multiple Calculated For Commercial Proper ty?

Use the below formula to calculate the equity multiple for commercial properties:

Equity Multiple= Total Cash Distribution /Total Equity Invested

Consider the following example:

If an investor buys a commercial property for a price of $4million and received a net cash flow of $300,000 annually and then decides to sell the property for $4million 5 years later. They’re equity multiple will equal 1.37.

$300,000 5 years + $4 million = $5.5 million/$4 million = 1.37

Basically, for every $1 that was invested, the investor could expect to get a return (before taxes) of $1.37 after the completion of 5 years.


Equity Multiple Vs. Cash On Cash Returns

There’s little difference between equity multiple and cash on cash returns. Cash on cash returns are calculated as a percentage value which is expressed on an annual basis. Equity multiple is usually calculated for a multi-year period that incorporates the sale value of the property (when the investor sells it) in to the calculation.


Cash on Cash Returns

Use the following formula to calculate cash on cash returns.

Cash on Cash Returns= Total Cash Distribution (NOI) /Total Cash Investment

If we had to calculate the cash on cash returns for the above example over the course of the year, we would get:

$300,000/$4 million = 7.5% Cash on Cash Return

For a period of 5 years, we would have to multiply this number by 5. We would get the following:

7.5% × 5 years = 37%

We’ll then have to add 1 (to represent the sale of property at $4million) and we’ll get 1.37 – the equity multiple of property.

For more information on equity multiple and how it is used consider asking your commercial real estate agent for assistance.

Contact the expert real-estate agents of Pivotal Commercial Realty, Inc in Toronto. We’ll be happy to help you in any way we can.

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By seoserviceusa93 • February 8, 2019
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