One of the common terms you will see as you review past deal track records for multifamily syndicators is called an equity multiplier. You may also see this as a projected number before the investment opportunity has begun, but typically you will see it showcased after the deal has been completed to indicate how the investment performed. This short article will explain what it an equity multiplier is, how it is calculated, and how it can be used to gauge the performance of a specific syndication investment.

An equity multiplier is simply a metric that tells you how much of the investor’s equity contributions (their cash investments) were turned into profits during a specific deal cycle. There are two components to the multiplier: the money contributed by investors (called equity or capital) and the profits from the investment (including cash flow during the deal and profits from the sale at the end of the deal). This number ultimately shows you how much the syndication team was able to multiply the capital put in by investors for the deal. Of course, a higher multiple means more money for investors. 

The formula for calculating the equity multiplier is fairly basic:

Equity multiplier = Total profits / Equity invested

Let’s use a quick example scenario to help bring it to life. A syndication team has a 200 unit apartment complex in Phoenix that has just sold. Investors put in $4M in equity contributions, meaning $4M was raised for the deal across all investors. The property generated $2M in cash flow over 5 years and sold for a profit of $6M.

To get the equity multiplier, you would simply take:

($2M cash flow  + $6M in profits from sale) / $4M of equity invested = 2X equity multiplier

Essentially, the deal was able to double the equity put in by the end of the 5 years. Not too bad! Ideally, the higher the perceived risk of the investment, the higher you want your return to be on that investment. The great part about passive real estate investments is that you’re not doing any of the hands on work in order to generate that return.

This simple calculation can help you understand at a glance how a syndication investment opportunity performed so you can compare it with other syndication investments. It can provide some insight into how well the syndication team is able to generate profits across deals. Of course, past performance is not a guarantee of future performance, so it’s still important to evaluate what assumptions are being made to generate the projections for the deal you’re looking to invest in before you commit.

For more ways to evaluate returns on a multifamily syndication investment, check out our other article which discusses the different classes of investments, how they affect your returns, and common terms like Total Return, IRR, and Investor/Sponsor splits.

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