What Multiple on Invested Capital (MOIC) Means
MOIC, which stands for Multiple on Invested Capital, is a key performance metric used in private equity to measure the return on an investment relative to its initial cost. MOIC provides an important metric because it allows private equity firms and their investors to assess the overall success and profitability of an investment, as well as to compare the performance of different investments and funds.
At EquityMultiple, we we specialize in underwriting, structuring, and curating carefully vetted real estate investment opportunities that aim to deliver an attractive MOIC to self-directed individuals. Notably, real estate potentially brings the possibility of achieving an attractive multiple on invested capital that is alternative to other asset classes, namely stocks.
MOIC Formula
Multiple on invested capital (MOIC) is defined by a simple formula:
Are you an accredited investor looking to access passive real estate investments? If so, you may have some familiarity with the term “Multiple on Invested Capital” (MOIC), but how can you use it to make better investment decisions? In this blog post, we’ll explore the role of MOIC, how it applies to real estate investments, and how it compares to other key real estate return metrics. We’ll also provide several examples of MOIC calculations in the context of a real estate investment. So, if you’re ready to learn more about MOIC, let’s get started!
MOIC Definition
MOIC is an essential tool for individual investors to compare investment opportunities. Understanding how to use MOIC helps in identifying how much an investment has grown over time. Moreover, it can be used to compare investments in various asset classes, including real estate. Here’s how you can utilize MOIC:
- Comparing Investments: By analyzing MOIC, you can compare different investments to determine which one has generated the highest multiple on your capital.
- Evaluating Performance: MOIC allows you to evaluate an investment’s performance over time, assisting in future investment decisions.
- Risk Assessment: Although MOIC doesn’t directly measure risk, a higher MOIC might indicate a successful investment strategy, whereas a lower MOIC might signal underlying issues.
The formula for MOIC is straightforward:
MOIC = Total Cash Inflows / Total Cash Outflows
Consider a detailed hypothetical investment in a commercial property to illustrate this point. An accredited investor allocates $1 million towards the purchase of a multifamily apartment complex. Throughout the investment period, the property amasses $500,000 in rental income and is eventually sold for $2.5 million. The total cash inflow from this investment would thus be $3 million ($500,000 + $2.5 million), resulting in a MOIC of:
MOIC = $3 million / $1 million = 3x
This indicates a return thrice the initial investment, showcasing the lucrative potential of real estate investments.
A recent EquityMultiple investment showing target cash flows over the anticipated hold period. For a hypothetical $100K investment, this results in a target 1.8x multiple on invested capital (MOIC), synonymous with the equity multiple figure.
Now, take a look at the cash flows for a hypothetical $100K investment into one of EquityMultiple’s pre-built portfolios. This investment only targets a 1.5X MOIC. However, you can see that with the repayment of principal in Year 3, the shape of cash flows is different from some other equity investments. This underscores the point: MOIC does not capture the timing of cash flows in the way that IRR (another common return metric) does.
To bring things home a bit more, here’s another hypothetical example, using a fictional property:
The Buena Vista Apartments, a Multifamily Complex in San Antonio:
- Initial Investment: $500,000
- Projected Net Operating Income (5 years): $200,000
- Projected Sale Price: $750,000
- Total Return: $950,000
- MOIC: 1.9x ($950,000 / $500,000)
What Is Multiple on Invested Capital in Practice?
Multiple on Invested Capital (MOIC) is a metric used to measure the performance of a real estate investment. It is calculated by dividing the total return on an investment over a given period by the amount of capital invested in that property. MOIC offers investors an insight into how well their investments are performing, and it can be used to compare different types of real estate investments.
In simple terms, MOIC helps you understand how much money you’ve made compared to how much money you put in. This metric gives investors an idea of their return on investment (ROI), which is essential for making informed decisions about where to allocate resources. In other words, it allows investors to compare the expected returns from different types of real estate investments and decide which offers them the best value for their money.
To calculate MOIC, divide the total return earned from an investment by the initial capital invested in that property over a set period of time. For example, if you invested $100,000 in a rental property and earned $50,000 in rent over five years, your MOIC would be 0.5 ($50,000 / $100,000). This means that for every dollar invested in this property, you’ve earned half a dollar back—not necessarily a great result! However, if you had instead invested $200,000 and earned back $250,000 over five years your MOIC would be 1.25 ($250,000 / $200 000), indicating that for every dollar invested in this property you’ve earned more than one dollar back—a better result all round!
It’s important to note that calculating MOIC does not take into account any fees associated with buying or selling properties such as taxes or closing costs; these should be considered separately when assessing returns on any real estate investment. Additionally, different types of properties may have different levels of risk associated with them; so always make sure to take risk-adjusted returns into consideration when evaluating potential investments using MOIC as a metric.
MOIC in Real Estate
MOIC is a particularly useful metric for investors interested in real estate investments, since it helps them quantify the potential return of any investment and compare different types of investments side by side to determine which one provides the best return. For example, an investor may calculate the MOIC for two different apartment complexes, one with a higher initial purchase price but lower operating costs and another with a lower initial purchase price but higher operating costs.
Most EquityMultiple investment materials feature a Sponsor Q&A, detailing the project plan. As you’ll see, the factors that add up to produce an attractive MOIC can be varied and complex. That’s why it helps to have an asset manager in your corner, central to what EquityMultiple provides to individual investors.
By comparing their respective MOICs, the investor can make an informed decision about which investment offers them the best return on their capital. In addition to helping investors compare returns, MOIC also gives them insight into how much money they stand to make from their investment over time. To calculate this number, add up all cash flow generated from rental income and sales proceeds throughout the period of ownership. Then divide that sum by the initial amount of capital invested into the property. This will give you an indication of how much profit you stand to make on your original investment over time—the higher the number, the better your ROI will be.
MOIC and Commercial Real Estate
In commercial real estate, MOIC is particularly valuable for several reasons:
- Project Comparison: It allows investors to compare different property types (e.g., multifamily, office, industrial) on an equal footing.
- Risk Assessment: Higher MOICs in certain property types might indicate higher risk, helping investors balance their portfolios.
- Investment Horizon: MOIC helps in comparing investments with different time horizons, which is common in real estate where hold periods can vary significantly.
At EquityMultiple, we provide detailed MOIC projections for each investment opportunity in our Grow pillar, allowing our accredited investors to make informed decisions aligned with their strategy.
MOIC Meaning
What does a “multiple on invested capital” really mean? How do investors use the MOIC metric in practice?
Calculating MOIC is a great way for investors to assess how well they are managing their real estate portfolio as a whole. By tracking each individual property’s MOIC over time, investors can get an idea of whether or not they are making wise decisions when it comes to selecting investments and managing them effectively. If any particular property has an unusually low MOIC relative to other properties in your portfolio, it may be worth re-evaluating why that is so and making necessary changes accordingly.
Let’s take a look at a recent case study, which considers sample portfolios of EquityMultiple’s Ascent Income Fund and Alpine Note in various combinations.
What type of MOIC is achievable via allocation to EquityMultiple’s flagship investment options?
As the case study shows, fine-tuning an allocation to these or other investments can impact IRR and MOIC (hence total profit) in various ways. As an investor, it’s worth considering what your true objective is: total profit, or time-weighted performance.
Download the Full Case Study
Overall, Multiple on Invested Capital (MOIC) is a powerful tool for evaluating real estate investments that provides investors with tangible evidence for how well their investments are performing relative to others in similar markets or portfolios alike. By using this metric when assessing potential opportunities and tracking results as part of their larger portfolio management strategy, investors can gain valuable insight into just how profitable any given real estate investment really is—and use that information to make smarter decisions down the line.
A MOIC would be most relevant to equity real estate investments, such as are found in EquityMultiple’s Grow pillar.
MOIC versus IRR
When it comes to assessing the success of real estate investments, two metrics are commonly used—Multiple on Invested Capital (MOIC) and Internal Rate of Return (IRR). These two metrics are both commonly used by investors to measure the performance of a real estate investment, and they each offer different insights into an investment’s potential profitability. MOIC is calculated by dividing the total return on an investment over a given period by the amount of capital invested in that property. It does not take into account any fees associated with buying or selling properties, and different types of properties may have different levels of risk associated with them. MOIC helps investors understand their return on investment (ROI) and compare different types of real estate investments to determine which offers them the best value for their money.
There are a number of different return metrics that you may encounter while looking at any given EquityMultiple investment. The important thing for you as an investor is to get comfortable with the potential return and the timing of cash flows, and consider whether that fits your strategy, especially given the risk factors in the deal. Just as important: you can always reach out to Investor Relations at ir@equitymultiple.com or via the chat feature in the platform if you have questions.
— Daniel Brereton | Director, Investor Relations
On the other hand, IRR is calculated by taking into account all cash flows related to a project or investment over its life span. This includes all costs associated with buying or selling properties, taxes, debt payments, operating costs, as well as any profits made from rental income or flipping houses. IRR gives investors insight into how long it will take for an investment to become profitable and what kind of returns they can expect over time. The main difference between MOIC and IRR is that MOIC only looks at profits earned from an initial capital investment while IRR takes into account all cash flows related to a project or investment over its life span—including any profits made from rental income or flipping houses. Both metrics are useful when assessing the success of real estate investments, but depending on your goals and needs as an investor you may find one metric more beneficial than another in certain situations.
In short, multiple on invested capital provides a static snapshot of profitability; IRR provides a time-weighted return figure. MOIC tells you how the value of an investment has grown on an absolute basis, while an IRR tells you how that investment has generated returns on an annualized basis. A 2.0x MOIC over 3 years reflects an attractive annual return, equating to an IRR of c. 26%, while the same MOIC over 5 years equates to an IRR of c. 15%.
MOIC versus Equity Multiple
Multiple on invested capital and equity multiple are functionally the same thing. Multiple on invested capital may be more common in venture capital and corporate investment settings, but the two concepts are interchangeable.
For more on real estate return metrics and concepts, please refer to our introductory series.
Multiple on Invested Capital — the Bottom Line
In conclusion, understanding MOIC is crucial for accredited investors venturing into passive real estate investments. At EquityMultiple, we’re committed to not only providing attractive investment opportunities but also educating our investors on key metrics like MOIC. By leveraging this knowledge, you can make more informed decisions and potentially maximize your returns in the dynamic world of commercial real estate investing. Keep in mind that, should you have questions while browsing investment opportunities, you can always access our Investor Relations Team via the chat feature at the bottom right of your screen or by emailing ir@equitymultiple.com
Ready to explore real estate investments with attractive MOIC potential?
MOIC FAQs
Q: Is a higher MOIC always better?
A: Generally, a higher MOIC indicates a more profitable investment. However, it’s crucial to consider other factors, such as the investment period and associated risks.
Q: How does MOIC differ from IRR?
A: MOIC measures the total return on investment without considering the time value of money, while IRR provides an annualized rate of return, factoring in the investment period.
Q: Can MOIC be used for all types of investments?
A: Yes, MOIC is applicable across various investment types, including real estate, private equity, and venture capital, to gauge performance.
Q: Should I use MOIC as the sole metric for investment decisions?
A: No, MOIC should be one of several metrics considered. A comprehensive set of financial indicators is vital for fully understanding an investment’s potential.
Understanding MOIC is a crucial component of real estate investing. By integrating this knowledge with other financial metrics and thorough market analysis, accredited investors can make well-informed decisions that align with their investment goals. EquityMultiple stands as a valuable resource, offering the tools and opportunities needed to navigate the complex landscape of commercial real estate investing, ensuring investors are well-equipped to make decisions that can lead to substantial returns.
