There are 3 figures that go hand-in-hand when trying to determine a commercial/apartment property's value. They are; Net Operating Income (NOI), Cap Rate (CR) and Asking Price or Purchase Price (PP). If you know 2 of the figures you can always figure out the third.

I will be talking about the NOI of a property. More specifically, how NOI is calculated as it relates to an apartment building.

We are going to start with a simplified version of how to arrive at the NOI of a property and then expand each category. Basically, the formula is: Income -Expenses (other than debt service) = Net Operating Income.

INCOME:

First thing, I determine the income generated by the property. I start with the Gross Potential Rental Income (GPI) or Scheduled Gross Rental Income (SGI). Both terms are used interchangeably within the industry. The GPI assumes that all apartments (100%) are rented at full market value even if some are actually vacant or discounted.

For our example, I will use a 30 unit apartment building that has all 2 bedroom, 1 bathroom units with market rents of $600 per month each. Therefore, the GPI of this complex as an annual figure will be: 30 units x $600/month = $18,000/month x 12 months = $216,000 per year of Gross Potential Income.

The second step in the equation is to determine the vacancy of the property, both physical and economic. If you have a 30 unit complex and 3 units are vacant, the vacancy is 10% (3/30 = .1 or 10%). I will not be calculating economic vacancy in this ... Read More…