What is the appropriate equity denominator to use when calculating cash on cash/equity multiple when the investment is all equity upfront and leverage is applied later during the hold period? For the equity multiple, do you use your peak equity investment or a weighted average of equity invested? For Cash on Cash, is the denominator the peak equity amount, the equity outstanding, or the average?
Trending Content - Real Estate Forum
Career Resources
For equity multiple, I would use peak equity involved as the denominator.
Cash on cash (ROE) is more of a yearly snapshot of an investment, as opposed to a full time-horizon valuation metric. Therefore, I assume that the ratio would only be beneficial to utilize during the year of financing and going forward, as then it would reflect the true denominator.
It's a case by case kinda thing, but I would say if you close an acquisition all equity, and then put post acquisition financing on it, I would use the denominator as the revised equity basis post leverage. I kinda look at this like I would for a "stabilized cash-on-cash" viewpoint. For all of our investments, we do 10-year holds where we refinance post stabilization. The stabilized cash-on-cash should be your new equity basis post your return of capital from the refi.
If you were to close all cash, re-entitle, and then you are looking to put debt on the investment in year 2 or year 3: In this instance you to continue to use your peak equity as the denominator.
Thanks, this is very helpful.
depends when you are calculating...if during a specific period of time, use the contributed equity at that time. If you're looking at a GROSS MOC or COC return, then use peak equity. There could be some debate about using a weighted average throughout the deal, but a safe bet is to just use peak equity for deal level cash on cash.
Rerum eaque ut in tempore enim. Et corrupti accusamus laudantium in est rerum velit vero. Necessitatibus rerum numquam vitae quo fugit. Enim ea placeat rem qui explicabo eum mollitia odio.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...