Equity Multiple in Industrial Real Estate
An equity multiple compares the income your industrial investment has generated compared to the amount of capital you put in. Use our calculator to find yours.
The equity multiple is a simple financial metric used to compare the income an investment has generated compared to the amount of capital input into it during a specific period of time, usually the length of time an investor plans to own an asset.
This metric is used to evaluate and compare different commercial real estate opportunities to see which offers a greater return, though it is best to use additional calculations — including cash-on-cash return or IRR calculations — to gain a more comprehensive view of an opportunity.
The higher your equity multiple is, the higher your return. If your multiple is greater than 1, you have recouped your full investment, and a multiple below 1 means you have taken an overall loss.
Equity Multiple Calculation
Before calculating your equity multiple, you should have four data points:
Initial investment amount (purchase price), plus any capital expenditures
Divestment amount (sale price)
Income generated by the property per year
Length of investment holding period
The overall formula is simple, as seen below:
Equity Multiple = Total Cash Distributions ÷ Total Invested Capital
Your total cash distributions are, effectively, all income you realize from the investment. This would include your annual income from rents and other sources (multiplied by the number of years the asset will be held), plus the expected income from the sale of the property.
Your total invested capital, on the other hand, would include the acquisition price plus any (usually major) capital expenditures you are able to anticipate.
Equity Multiple Calculator
Simple Example
You plan to acquire a 50,000-square-foot industrial asset for $3 million. You make your calculations, and anticipate that your rental income will be $100,000 per year. You plan to hold the asset for five years, selling it for $4 million.
In this case, your total cash distributions would be your annual rental income ($100,000 × 5 years, or $500,000) plus your expected sale price of $4 million. Thus, your total cash income would be $4.5 million.
Your total invested capital would simply be the price you paid on the investment, or $3 million.
$4.5 million ÷ $3 million = 1.5x Equity Multiple
If you then ran the same calculation on other potential investments, you could see at a glance which appears to offer a better return.
It Can Be More Complicated, However
Realistically, however, equity multiple calculations take into account more factors than involved in the previous example. That $3 million acquisition? Let’s say that was a value-add purchase, and you invested $1.5 million to completely renovate the asset, plus you incurred additional maintenance costs of $100,000 per year.
This would increase your total invested capital to $5 million for that same five-year period. Of course, you would certainly charge higher rents for your newly renovated asset, and your sale price at the end of your holding period would also likely be significantly higher. These factors all generally would need to be included in your calculations.
Limitations of Equity Multiple Calculations
There are some notable limitations for using equity multiples in your investment calculations. For one thing, the length of time can often be misleading — imagine an equity multiple of 2x calculated on a 30-year term. Sure, the return is positive, but it ignores opportunity costs associated with such a long hold term, and it can be confusing if looking at investment opportunities with different hold times.
Also, due to the projected nature of many of the variables, a calculated equity multiple is by no means a guarantee that an investment will yield a solid return. Your expected sale price five years down the road may be completely unreasonable, or perhaps your property will have occupancy trouble. All of this can easily throw off your projected capital distributions.
Despite the potential for inaccuracy, this metric is still useful, but it usually should not be used on its own — other calculations can offer additional insights that an equity multiple does not encompass.
Other Calculations
Two useful metrics that should be considered alongside an equity multiple are internal rate of return, or IRR, and cash-on-cash return calculations.
An internal rate of return can be particularly useful in determining whether or not an investment opportunity is a strong one, as IRR calculations include the time value of money. Of course, a downside to this metric is that an investment with a higher IRR may have a lower equity multiple.
Cash-on-cash returns are essentially the same calculation as an equity multiple, but with two key differences: The result is expressed as a percentage, and it is calculated on an annual basis. This provides a much clearer picture of the annual returns on an investment, but it would not include the sale of the asset until the year it is sold.
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Related Questions
What is an equity multiple in industrial real estate?
An equity multiple describes how much money an industrial real estate investor can earn compared to their initial investment. It utilizes two figures: total equity invested and total cash distributions over a specified period of time.
A good equity multiple depends on a few factors — most importantly, the time window of the investment and the investment’s potential risks. To obtain a complete picture, investors should also compare a property’s equity multiple to other metrics, like a cash-on-cash returns and an internal rate of return (IRR).
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What are the benefits of investing in industrial real estate with an equity multiple?
Investing in industrial real estate with an equity multiple can provide investors with a number of benefits. Equity multiple allows investors to compare the total cash distributions they receive over a specified period of time to their total equity invested. This metric can help investors determine the potential return on their investment and compare it to other metrics, such as cash-on-cash returns and internal rate of return (IRR). Additionally, equity multiple can help investors assess the potential risks of their investment and the time window of the investment.
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What are the risks associated with investing in industrial real estate with an equity multiple?
Investing in industrial real estate with an equity multiple carries the same risks as any other real estate investment. These risks include market volatility, tenant turnover, and changes in local economic conditions. Additionally, industrial real estate investments may be subject to environmental risks, such as contamination or hazardous materials. Investors should also consider the potential for natural disasters, such as floods or earthquakes, when evaluating industrial real estate investments.
For more information on the risks associated with investing in industrial real estate, please see Investopedia's article on the Risks of Investing in Industrial Real Estate.
How does an equity multiple in industrial real estate compare to other types of investments?
An equity multiple in industrial real estate is comparable to other types of investments, such as stocks and bonds. It is important to compare a property's equity multiple to other metrics, such as cash-on-cash returns and internal rate of return (IRR), to get a complete picture of the investment.
For example, a property with a higher equity multiple may have a lower cash-on-cash return, or vice versa. Additionally, a property with a higher equity multiple may have a lower internal rate of return, or vice versa.
It is important to consider all of these metrics when evaluating an investment in industrial real estate.
What are the tax implications of investing in industrial real estate with an equity multiple?
The tax implications of investing in industrial real estate with an equity multiple depend on the investor's individual tax situation. Generally, investors will need to pay taxes on any profits they make from the investment. This includes any cash distributions they receive from the investment, as well as any capital gains they make when they sell the property. Investors should consult with a tax professional to determine the exact tax implications of their investment.
What are the best strategies for investing in industrial real estate with an equity multiple?
The best strategies for investing in industrial real estate with an equity multiple depend on a few factors, such as the time window of the investment and the potential risks. Investors should compare a property’s equity multiple to other metrics, such as cash-on-cash returns and an internal rate of return (IRR).
When investing in industrial real estate, investors should consider the following strategies:
- Analyze the market and the property’s potential for growth.
- Understand the risks associated with the investment.
- Calculate the equity multiple and compare it to other metrics.
- Determine the time frame of the investment.
- Research the property’s current and potential tenants.
- Understand the property’s current and potential cash flow.
- Analyze the property’s current and potential expenses.
For more information, please visit Commercial Real Estate Loans' Equity Multiple page.