RealtyShares.com is optimized for the latest versions of Chrome, Firefox, Safari, and Internet Explorer.

Continuing to use an outdated browser may result in site malfunction and even introduce security risks. Please consider upgrading or switching to a browser that’s up to date. Review browser upgrade options

×

Please enable JavaScript to get the full experience of this website.
    LOG IN
    INVEST
    Investing Fundamentals
    RealtyShares 101
    Passive Income
    Investment Highlights
    Created with Sketch.

    IRR vs. Equity Multiple: Which Should You Use?

    Brian Esquivel
    Brian Esquivel
    Senior Director, Product and Strategy
    Brian has over a decade of experience in commercial real estate investment and finance. Prior to RealtyShares, he led commercial equity originations as a Vice President at RealtyMogul.
    IRR (Internal Rate of Return): A value that describes the sum of all future cash flows according to when they occur in time.
    According to the basic time-value of money, a dollar you have today is worth more than a dollar in the future. The IRR reflects that the further in the future earnings from an investment are received, the less valuable they become. (article continues below)
    Hero Article IRR-vs-Equity-Multiple-Which-to-Use
    The sooner the same earnings from investment are received, the higher the IRR.
    • An offering’s IRR is often used to compare investment options with different funding levels and/or time-horizons to find the best application of funds during a set period of time.
    • However, a project with a higher IRR does not necessarily mean it is a better investment. IRR calculations do not take into consideration the risk profile of a project or other variables potentially affecting overall return.
    In principle, a higher IRR could translate to the same amount of cash received, but at an earlier time, and conversely a lower IRR could actually return more cash. The same IRR could also apply to two different equity multiples (EM). Here is an example:
    Equity Multiple
    Equity Multiple: A ratio dividing the total net profit plus the maximum amount of equity invested by the maximum amount of equity invested.
    The Equity Multiple of an investment does not take into account when the return is made and does not reflect the risk profile of the offering or any other variables potentially affecting the project’s return.
    IRR vs. equity multiple: which should you use?
    IRR and EM describe two different factors of any real estate investment, and both can be valuable information when considering an investment.
    • For investors concentrated on the best application of funds over a shorter period of time, a stronger IRR might be more relevant.
    • For investors looking for a long-term return much larger than the initial investment, an offering’s equity multiple might be the best metric to study.
    In either case, the equity multiple is helpful in understanding the actual amount of money coming back to the investor, but consider both when evaluating any real estate investment, and remember that neither guarantee financial performance.
    Share this article:
    Browse:
    Investing Fundamentals
    IRR
    Equity Multiple
    Calculate Returns
    You might also like:
    Investing Fundamentals
    How Do I Calculate My Returns?
    How Do I Calculate My Returns?
    Akshay Verma
    By Akshay Verma
    How We Vet Projects
    5 Things That Happen to an Investment Before You See It
    5 Things That Happen to an Investment Before You See It
    Bryan Schultz
    By Bryan Schultz
    How We Vet Projects
    The Life Cycle of Your Investment
    The Life Cycle of Your Investment
    Anthony Vu
    By Anthony Vu
    Passive Income
    Illiquidity and Real Estate: Capturing the Upside
    Illiquidity and Real Estate: Capturing the Upside
    Lawrence Fassler
    By Lawrence Fassler
    RealtyShares 101
    How to Read an Investment Page
    How to Read an Investment Page
    Colin Donnelly
    By Colin Donnelly
    Ready to get started?
    Ready to get started?
    Browse curated investment properties from around the US with just a few clicks
    Start investing
    CONTACT US
    contact@realtyshares.com
    IIRR has acquired RealtyShares.com from RealtyShares Inc.
    We will continue to operate the RealtyShares site and offer the same high quality platform and services.
    As of April 29, 2019, all RealtyShares users are subject to the Privacy Policy and Terms of Service of IIRR Management Services,
    which provides the same level of privacy rights and protections for users' personal information as
    RealtyShares's former Terms of Service and Privacy Policy
    2019 RealtyShares, Inc. All Rights Reserved.