Buying, selling and operating apartments in Portland

Financial Measures | 17 April 2010

What are the major metrics used to determine an apartment’s financial performance?Net Operating Income (NOI) = Total income in $ of your property less expenses NOT INCLUDING debt service or mortgage.

Capitalization Rate (Capitalization Rate) = NOI/Sales Price. This is a first level ranking of properties. Capitalization Rates can range from 3% (trophy properties) to > 10% (for cash cows) and higher is better. A general rule of thumb is that capitalization rates should be higher than prevailing interest rates.

Cash-on-Cash return = CFBT/down payment. Is the pre-tax return on your actual money at risk. This return is the closest metric to other real world investments for return. However, apartments do offer a tax sheltered return on your capital. A Cash-on-Cash return of 4% for first year operation is a minimum and higher is better.  CFBT (Cash Flow Before Taxes) = NOI – Mortgage Payment.  After risk adjustment, this is probably the closest metric to use to compare financial return with other types of investments like T-bills or stocks.

Internal Rate of Return (IRR) = The projected sum of cash flows over a given period of time. It is usually expressed as an annual percentage return on investment. However, it relies on assumptions in growth of income, expenses and value of the apartment. IRR is forward-looking and has less confidence factor than a measure like cash-on-cash which uses current actual numbers. For 7 year periods, a number > 12% is an acceptable return and higher is better.

Gross Rent Multiplier (GRM) = Sales price/Gross Income. This indicator ranks a property based on how much income (rents and otherwise) it can generate for each purchase $. This will be in the range of 5-20. Lower is better for a buyer. A lower GRM implies either higher rents or a lower sales price compared to similar properties.

$/unit = How much does each unit cost you? This is a rough indicator of worth. Each complex is different and income can be affected by different factors such as unit mix, location and physical shape among others.