The commercial real estate industry is a competitive ground. Every asset acquired must be able to deliver ROI (Return on Investment). Equity multiple is an essential factor in calculating whether or not the property has a good ratio of profitability.
Gus Dahleh recommends calculating your potential equity multiple to ensure your profit for every property you want to buy. With many factors directly affecting earning in real estate, Gus Dahleh believes that backing your decision making with numbers is crucial.
Equity Multiple in Real Estate
Equity Multiple is a metric used by real estate investors to calculate and evaluate the potential ROI of a property. It is the expected profit of the commercial building after the initial investment.
Equity Multiple is a tool Gus Dahleh uses to help him make a quick comparison of two or more investment options. Having evaluated the properties available and knowing how much return each one can deliver after the initial investment is of great advantage. It helps every investor make smarter decisions and guarantee profit at the end of the day.
Using Equity Multiple for Real Estate Investment Evaluation
Some formulas can be used in evaluating a property’s equity multiple. Here are the methods in simplified equations:
Equity Multiple = Total Cash Distribution / Total Invested Capital
Equity Multiple = Total Realized Profit + Equity Invested / Equity Invested
Property1: Bought for $200,000
Property 1: Sold for $250,000
Equity Multiple = $250,000 / $200,000
Equity Multiple = 1.25
Commercial Property: Bought for $10 million three years ago.
Yearly Rental Income: $200,000
Current Market Value: $15 million
EM = 15M + (200,000 x 5) / 10M
EM = 16M / 10M
EM = 1.6
Identifying a Good Equity Multiple Ratio
Basically, the higher the ratio, the better. If the proportion is higher than two, it can already be considered a gold standard and a guaranteed profit. Although only specific properties have that kind of ratio and most properties will have an equity multiple ranging between 1 to 1.9.
According to Gus Dahleh, a good equity
multiple for a commercial real estate property will be above 1.0, which generally indicates that you will make your capital back from renters while making some extra cash. An equity multiple of 2.0 typically projects that you will double your money. If the ratio shows a number below 1.0, that could simply mean you lost a part of your capital.
Limitations of Equity Multiple
An equity multiple provides a projection of the potential profitability of commercial real estate property. However, it will not be all you need to consider and evaluate your investment, according to Gus Dahleh. Equity multiple does not take into account the amount of time the capital of the investor gets tied up in that particular property. It could be stagnant in a year, two years, five years, depending on how fast the property appreciates.
Additionally, equity multiple will not project the cash flow distribution throughout the investment. If the property retains its value for three years, without any appreciation, the investor’s money will remain at the same amount. Thus, it is crucial to consider the location and how fast the area is developing. Suppose the location of the property is located at a prime spot for commercial spaces, for example. In that case, it is more likely to increase the property value faster than properties located in residential areas.
Equity Multiple with Internal Rate of Return (IRR)
Time is gold, as what many real estate investors would say. Property investors value time as much as they value profit. If the property is stagnant, it could mean dormant money. It is always best to invest in properties that will deliver ROI plus profit fast. The faster the return is, the more investments it can cater to instead of having your money on pause on a particular property.
Gus Dahleh always uses equity multiple alongside IRR, and it is because, in such a way, he can forecast the potential profitability of the real estate property. It will also keep his assets continuously earning. Basically, the longer the investment is held on one property, the lower the total investment return.
However, the internal rate return will not take into account time. It will only project the measure of the overall profitability of the investment. Thus, investors who want to guarantee faster returns pair the two equations for a better evaluation and projection.
About Gus Dahleh:
Gus Dahleh is a successful real estate entrepreneur that has accumulated many multi-million dollar commercial properties. JP Morgan Chase, AT&T, Walmart are a few of his big tenants. He has the capabilities to turn a lost cause property into income-generating real estate for investors.
Gus Dahleh has a track record of secure and property commercial property investments. This method led his business to acquire more commercial properties and cater to tenants such as Cubesmart, JP Morgan Chase Bank, AT&T, and Walmart, just to name a few. Gus Dahleh is a man of vision who executes solutions in the world of the real estate industry.