Unlevered/levered Equity multiple?

So equity multiple can either be levered or unlevered right?
so for this question


If you buy a property at a 6 cap, using 60% Leverage (5% Interest only), what is the year 1 cash on cash return?

3/40

Since cash on cash is a levered metric we gotta subtract NOI-interest payments. Would it ever just be 6/40? If the interviewer said a unlevered cash on cash..?
 

Continuation of previous question, this is pen and paper question - if you hold this building for 10 years and NOI grows by 3% each year (compounding), what is your unlevered equity multiple and IRR?

For this one, can it ever be unlevered equity multiple? Then would it be (133+70+ INterst payments)/40?

would interest payments be 60*(.05^10).....?
Im so confused with levered and unlevered someone pls help

 

Ah, the classic mix-up between levered and unlevered metrics in real estate investment analysis! Let's break this down in a way that even a monkey could understand it (no offense to my fellow primates).

Levered vs. Unlevered Basics

First off, unlevered metrics do not take into account any debt financing. They're all about the property's own operational performance. Levered metrics, on the other hand, factor in the effects of financing (debt).

Equity Multiple

  • Unlevered Equity Multiple looks at the total returns to the property without considering debt. It's essentially the total cash flows and sale proceeds received from the property, divided by the total equity invested.
  • Levered Equity Multiple includes the impact of debt on the returns. It's the total cash flows (after debt service) and sale proceeds (after paying off debt) received, divided by the total equity invested.

Cash on Cash Return

Your example mentions a Year 1 cash on cash return of 3/40, derived from a $3 cash flow after debt service divided by $40 of equity, which equals a 7.5% return. This is indeed a levered metric because it considers debt service (interest payments).

If an interviewer asks for an unlevered cash on cash return, they're asking for a hypothetical scenario where the property is bought without any debt. In such a case, the cash on cash return would indeed be based on the property's NOI divided by the total purchase price (or total equity, since they're the same in an unlevered scenario). However, "unlevered cash on cash" is a bit of a misnomer since cash on cash typically refers to levered returns.

Unlevered Equity Multiple and IRR for a 10-Year Hold

When calculating the unlevered equity multiple for a 10-year hold, you're looking at the total returns generated by the property (NOI growth and sale proceeds) divided by the initial equity investment, without considering any debt.

  • NOI Growth: Starting at $6 of NOI and growing at 3% annually for 10 years.
  • Sale Proceeds: Calculated based on the cap rate at the time of sale and the final year's NOI.
  • Initial Equity Investment: The total purchase price in an unlevered scenario.

Interest payments wouldn't factor into the unlevered equity multiple calculation since we're ignoring debt.

For the IRR (Internal Rate of Return), it's a measure of the annualized effective compounded return rate that can be earned on the invested capital, i.e., the rate at which each invested dollar is projected to grow for each period it is invested. For unlevered IRR, you're not considering debt, so it's purely based on the property's operational performance and eventual sale proceeds.

Conclusion

Yes, you can have both levered and unlevered equity multiples. The key difference is whether or not you're taking debt into account. For unlevered calculations, forget about the debt and focus solely on the property's income and expenses. Remember, when in doubt, break down the components of your calculations, and it'll start to make more sense. Keep practicing, and you'll get the hang of it!

Sources: Real Estate Private Equity Technical Qs, Levered vs. Unlevered Free Cash Flow Difference, Real Estate Interview Questions Master Thread, Real Estate Interview Questions Master Thread, Corp Dev LBO returns question: Levered and Unlevered IRR

I'm an AI bot trained on the most helpful WSO content across 17+ years.
 
Most Helpful

Just break it down and chunk it out. 
 

so for unlevered, pretend there is no debt. Unlevered would be NOI less Capex. That value that you sum to will be unlevered cash flow. Take that value and divide it by the purchase price plus closing costs. That’s your unlevered cash on cash. 
 

To get levered, you subtract debt service from your yearly cash flow and divide it by your equity amount less debt amount. 
 

calculating equity multiple; it’s similar. For unlevered take all the cash flows and sale price assuming debt. For levered, sum all the cash flow after debt and upon sale, pay back the debt. 

 

Non eum consequuntur nulla et. Ea enim tenetur fugiat alias omnis. Enim corrupti quia quisquam dolor. Velit mollitia blanditiis facilis cum. Magni mollitia fuga mollitia consectetur consequatur.

Tempora dolorum omnis vel eligendi iusto repellendus facere consequatur. Sed laborum suscipit ut est quia. Reiciendis iure quia rerum et omnis fugit. Nostrum molestias eius odit consectetur asperiores consequatur eius. Distinctio odit quia quidem tempore ut nobis. Sit recusandae ducimus accusamus quae. Quia quaerat in aperiam temporibus vel ut sed.

Career Advancement Opportunities

April 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. New 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

April 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

April 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

April 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (87) $260
  • 3rd+ Year Analyst (14) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (205) $159
  • Intern/Summer Analyst (146) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Betsy Massar's picture
Betsy Massar
99.0
3
Secyh62's picture
Secyh62
99.0
4
BankonBanking's picture
BankonBanking
99.0
5
kanon's picture
kanon
98.9
6
CompBanker's picture
CompBanker
98.9
7
dosk17's picture
dosk17
98.9
8
GameTheory's picture
GameTheory
98.9
9
DrApeman's picture
DrApeman
98.8
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”