How the Equity Multiple Works in Commercial Real Estate
- By seoserviceusa93@gmail.com
- •
- 05 Nov, 2018
Purchasing commercial real estate is completely different to buying a house for one main reason—the investment is sufficiently higher.
Buying commercial real estate requires the use of various metrics for investor analysis; one such metric is the Equity Multiple
What Does Equity Multiple Refer To In Commercial Real-Estate?
The equity multiple happens to be a crucial and effectual financial metric that is commonly used in commercial real estate. The purpose of the equity multiple is to compare the amount of cash that was invested to the amount of money that particular investment generated during a specified period of time.
How Is The Equity Multiple Calculated For Commercial Property?
Use the below formula to calculate the equity multiple for commercial properties:
Equity Multiple=Total Cash Distribution/Total Equity Invested
Consider the following example:
If an investor buys a commercial property for a price of $4million and received a net cash flow of $300,000 annually and then decides to sell the property for $4million 5 years later. They’re equity multiple will equal 1.37.
$300,000 5 years + $4 million = $5.5 million/$4 million = 1.37
Basically, for every $1 that was invested, the investor could expect to get a return (before taxes) of $1.37 after the completion of 5 years.
Equity Multiple Vs. Cash On Cash Returns
There’s little difference between equity multiple and cash on cash returns. Cash on cash returns are calculated as a percentage value which is expressed on an annual basis. Equity multiple is usually calculated for a multi-year period that incorporates the sale value of the property (when the investor sells it) in to the calculation.
Cash on Cash Returns
Use the following formula to calculate cash on cash returns.
Cash on Cash Returns=Total Cash Distribution (NOI)/Total Cash Investment
If we had to calculate the cash on cash returns for the above example over the course of the year, we would get:
$300,000/$4 million = 7.5% Cash on Cash Return
For a period of 5 years, we would have to multiply this number by 5. We would get the following:
7.5% × 5 years = 37%
We’ll then have to add 1 (to represent the sale of property at $4million) and we’ll get 1.37 – the equity multiple of property.
For more information on equity multiple and how it is used consider asking your commercial real estate agent for assistance.
Contact the expert real-estate agents of Pivotal Commercial Realty, Inc in Toronto. We’ll be happy to help you in any way we can.
Before you go ahead and sign any papers to purchase commercial real estate in Toronto, spend some time learning and understanding the market.
Investors in commercial real estate have to consider the following before they decide where they want to put their money:
Interest Rates
For the first time in 7 years, the Bank of Canada increased its interest rate in 2017. The interest rate set by Bank of Canada has a direct impact of the on the cost of taking out a variable rate mortgage as well as other loans.
Fluctuations in the Bank of Canada interest rates also influences the growth of corporations and consumer spending, which impacts the demand for both residential and commercial real estate.
Investors all over the globe think of Canada’s commercial real estate market as a safe haven. Even though there is some uncertainty about the rise of interest rates, the contrast between tight supply and growing demand for real estate in the country has been a driving force in the real estate market.
The commercial real estate market continues to be viewed positively by international real estate investors with Toronto and Vancouver being the most popular destinations. In 2018, Toronto was considered one of North America’s major real estate markets to invest in. In 2019, both Toronto and Vancouver are expected to be in the continent’s top 3 destinations.
The growth in commercial real estate is being pushed by the increased sales in office buildings. Even the political uncertainty between US and Canada did not hamper the success of commercial real estate in the country.
Major Markets
In 2018, Canada’s commercial real estate sector hit a record breaking $36.2 billion. This growth can be attributed to the increasing demand of industrial, office, retail, multi-family units and ICI land.
Those looking to invest in commercial real estate in Canada should consider Toronto, Vancouver, Calgary, Montreal and Ottawa. In 2017, most of the growth in the sector was driven by office buildings but in 2018, industrial real estate led the way.
In the near future, the demand for industrial real estate is expected to rise due to the increase of e-commerce business in the country that are looking to build fulfillment centers nearby for fast and easy delivery.
The commercial real estate market in Canada is continuing to flourish. However various factors are expected to make bring changes to the landscape in the future.
2018 proved to be a record-setting year for the commercial real estate sector in Canada due to an influx of new projects and high occupancy rates. With that being said, property owners are advised to monitor fluctuations in the market. Like all real estate, the commercial real estate sector of Canada is prone to disruption.
Let’s take a look at the key disrupters in commercial real estate in Canada:
Shared Workspaces
There has been a dramatic shift in the way people work in the country. Canada is experiencing a boom in the start-up community , many of which are led by Millennials.
Traditional office spaces are being replaced with co-working spaces that are designed to enhance collaboration, allow for greater flexibility and lower operational costs at the same time. Open offices are much cheaper than conventional cubicles. Younger professionals have found a way to work with limited office space.
Landlords can’t just lease out their building to select tenants, they have to redevelop their office space so it caters to the demand of the modern workforce. This can involve offering flexible suites or open concept office spaces.