Hey Everyone. This is a follow up to last week’s post about return on investment. What return will your hard earned cash give you when invested in a specific real estate deal? The 2nd common metric that I rely on is the equity multiplier, which really comes into play when you buy, hold, and then sell properties.
If you recall in last week’s article, Cash on Cash is simply how much cash you receive each year compared to how much cash you invested in the first place.
But what if you hold your property for 5 years, then sell it? You got a return each year, then made a profit at sale. This brings me to the equity multiplier, another simple formula that gives you a great idea of ‘how did my investment do?’
The calculation is: Total Dollar Income Over The Life Of The Property (including proceeds from sale) ÷ Total Dollar Invested.
Example: If you invest $50,000 and receive $10,000 net proceeds each year, and sell the property after 5 years for a $50,000 profit, that’s a 2x equity multiplier…
Breakdown: $50,000 ($10,000 net proceeds x 5 years) + $50,000 (profit from sale) = $100,000 Total Dollar Income Over The Life Of The Property
$100,000 ÷ $50,000 (Total Dollar Invested) = 2 (read as a 2x equity multiplier) In other words, you doubled your money.
Pretty simple right?
The more aggressive the investment, the faster the potential to double your money (IF everything goes according to plan. Be wary of people promising overly-impressive numbers in short timeframes). The more conservative the investment, the longer it could take to double your money.
What kind of equity multiplier would excite you?
How fast would you want to double your money?