Equity multiple: how much comes back
The equity multiple is total cash returned to the investor divided by the cash invested. If you put in $100,000 and receive $191,000 over the life of the deal — distributions plus your share of the sale — the equity multiple is 1.91x. Anything above 1.0x means you got back more than you put in.
Its strength is simplicity. Its weakness is that it ignores time. A 2.0x multiple over four years and a 2.0x multiple over twelve years look identical, even though the first is a far better result.
IRR: how fast it comes back
The internal rate of return is the annual rate that makes the present value of all the cash you receive equal to the cash you invested. It accounts for both the size and the timing of every cash flow, so money returned sooner counts for more than money returned later.
IRR is the closest thing real estate has to a single annualized return, which is why sponsors lead with it. It is also sensitive to assumptions. A slightly earlier sale, a higher exit price or an early refinance that returns capital can lift IRR considerably, even when the total profit barely changes.
How the calculator works
It builds a simple year-by-year cash flow and solves it:
- Year 0 is your investment, entered as a positive number and treated as money going out.
- Each year of the hold, you receive a distribution equal to your starting cash yield on the invested amount, growing by the annual growth rate you enter.
- In the final year you also receive the exit proceeds: the cash returned to you when the property is sold or refinanced, including the return of your original capital.
- Equity multiple is total cash received divided by the investment. IRR is solved numerically so that the present value of the cash flows equals zero.
- Average annual cash yield and total profit are shown alongside, so you can see how much of the return comes from ongoing income and how much depends on the sale.
A worked example
An investor puts $100,000 into a five-year deal that projects a 6% cash yield in year one, growing 2% a year. Distributions total about $31,200. At the sale, the investor receives $160,000. Total cash back is about $191,200, an equity multiple of 1.91x and an IRR of about 15.1%.
Now stretch the hold to seven years with the same exit check. Distributions add up to more and the equity multiple rises above 2.0x, but the IRR falls to roughly 12%, because the largest payment arrives two years later. Neither number is wrong; they answer different questions.
Reading sponsor projections
Projected IRRs and multiples are forecasts built on assumptions about rent growth, expenses, interest rates and, above all, the exit cap rate. Before comparing two offerings, check:
- Whether returns are shown net of all fees and the sponsor’s share of profits. Investor returns should be.
- How much of the projected profit depends on the sale versus ongoing cash flow.
- The exit cap rate compared with today’s going-in cap rate. An exit at a lower cap rate than the purchase assumes the market will pay more for the same income.
- The hold period and what happens to returns if it runs longer than planned.
- Whether a refinance is assumed to return capital early, and what interest rate the refinance assumes.
Why the two numbers belong together
Use IRR to compare how efficiently different deals put money to work and the equity multiple to see how much wealth they actually create. A high IRR with a low multiple usually means a quick in-and-out with modest profit. A high multiple with a modest IRR usually means a long hold. Most investors look for a balance that fits how long they can leave the money invested and what else it could be doing in the meantime.
