NOI stands for Net Operating Income. Out of all of the numbers you see on an apartment property, this is by far the most important number. This is where the rubber meets the road. This is where you are going to decide whether this is a profitable or non-profitable property, by the net operating income. Not only does this give you a barometer for value, but also gives you a barometer of cash flow, and a barometer of how high you can make that cash flow become over the next 1, 2, 3 to 5 years. In other words, the value of the property is mainly tied to the net operating income that the property produces. The goal, as a buyer should be to find a property with a high net operating income and be able to increase that net operating income as quickly as you possibly can.
Gross rent multiplier. You find the gross rent multiplier by simply taking the price of the property and divide it by the annual gross income. CAP RATE: The CAP RATE is the net operating income (not the gross) before any mortgage payments (or sometimes called debt service) divided by the price of the property. NOI: NOI is the net operating income that the apartment property produces and is the most important number that you will find associated with an apartment building.
Apartment properties are valued much differently than single-family homes. What appraisers do is compare income streams that properties produce versus comparing bricks, mortar, wood, etc. They do use three kinds of methods to value property: the comparable approach, the cost approach, and the income approach. Keep in mind with apartment buildings and other investment real estate, appraisers will rely 80-90% on the income approach to value. So, let’s say you’re looking at a 12-plex that’s about 20 years old. This is the fourth or fifth 12-plex you’ve seen over the last few months that is of this age, location, condition, etc. After you’ve analyzed the other four or five 12-plexes, you’ve noticed that they’re consistently being offered at a 10% capitalization rate (Net Income Divided By Purchase Price) So, what that tells you is in the market right now, a 10% cap rate is pretty much what the properties are selling for.
Remember, the higher the cap rate, the more profit you’re going to have and if comparable apartment properties are being offered at a 10% cap while this one is being offered at a 11.5% cap, what that means is you could potentially have a profit. It also means you need to look carefully to make sure the owners aren’t leaving any financial information out, but it could be worth pursuing.
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Jacquelyn Donner
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