The goal of the NOI calculation is to capture all of the operating expenses, subtracting them from rental income, and resulting in the cash flow after expenses.

Operating expenses can be grouped in many ways, and not everyone does this calculation the same way. But, an example list of operating expenses of an apartment or multifamily project would normally include:

Property Ownership Related Expenses

· Taxes, whether property, school or other taxes on property value or location

· Insurance to protect investment from fire, damage, theft and liability

· Licenses and permits to operate

Utilities or Fuel

· Electricity
· Natural Gas
· Water & Sewer
· Cable TV or Satellite TV services
· Trash removal

Maintenance & Repair

· Exterminating
· Landscaping
· Decorating
· Cleaning
· Pool/hot tub maintenance
· Grounds maintenance/snow removal
· Elevator services
· Parking lot cleaning and maintenance/repaving
· Maintenance supplies
· Repairs

Salaries & Management

· Contracted management services
· In-house management salaries
· Housekeeping and in-house landscaping services
· Office staff
· Security Services
· Bonuses and commissions
· Payroll taxes & other payroll burden
· Legal/accounting/professional

Advertising and Marketing

· Print and other media for advertising
· Marketing materials and design services

These comprise the Net Operating Income expenses without reserves for capital expenditures or reserves for improvements and remodel. Adding these reserves to the subtotal of those expenses listed above would result in the operating expenses. Subtract that total from the income from rents to get to the NOI, or Net Operating Income.

Using this NOI, the potential buyer of an apartment or multifamily property can do a cap rate calculation to help in valuation of the property.

Using the prevailing cap rate of recently-sold properties, the buyer can determine the approximate value of the property in relation to the asking price. As this NOI is the cash flow, the seller can also determine a probable asking price using the prevailing cap rate.

Lenders can also use this number to determine through DSCR, Debt Service Coverage Ratio, the amount to loan on the property in a purchase transaction.

I’ll share more with you soon…

Warm Regards,

Karen Hanover, CCIM Candidate
Apartment Education Institute, President

The Cap Rate Calculation

Simply stated, the cap rate of an apartment property is the net operating income divided by the price, either asking or sold price.  It represents the rate at which the investment is recaptured by income.  The higher the cap rate applied to the same income, the lower the price.  The lower the cap rate applied to income, the higher the selling price.  In other words, a high price paid for income has a slower recapture, or lower percentage rate to get the investor’s investment back.  An example:

Net Operating Income / Price  =  Cap Rate

$105,000 / $1,500,000  =  .07, or a Cap Rate of 7%

In this calculation, the price could be either an asking price, or a recently sold price, depending on the buyer or seller’s goals.  If a buyer is considering buying the property in this calculation, the “price” in the calc is the asking price.  The buyer would get the cap rates of comparable properties sold recently in the area to see if this cap rate compares favorably.  If other properties have been selling at 9% cap rates, the price would need to come down to get that cap rate:

$105,000 / .09  =  $1,167,000

As other properties are selling at a 9% cap rate, to be competitive this property would need to be priced at $1,167,000 rather than the higher price it’s listed at with the 7% cap rate.

Looking from a seller’s side, there is a property owned that has a net operating income of $125,000, and the seller would like to determine a probable asking price for the listing.  Going out and getting the comps, prevailing cap rates average 8% for previous sales.  What would a probable listing price be, all other factors being similar to previous comparable sales?

$125,000 / .08  =  $1,562,500

If this seller wants to move the property quickly, using a 9% cap rate would yield a selling price of approximately $1,389,000.  Buyers and lenders will see more value in this apartment property if others are listed at the lower cap rate.

Karen Hanover, CCIM Candidate
Apartment Education Institute, President