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Yardi Corom
As an owner, you wear many hats and have many strengths. If interpreting reports is not among your talents, you’re not alone. Many leaders aren’t getting the most out of team updates because they are not comfortable with the terms used on the reports. A brief refresher may do the trick!
Below is a quick cheat sheet of nine common ratios that you will encounter and how to interpret them.
- Capitalization Rate (Cap Rate) When you are just getting started with a property, cap rate comes in handy. The cap rate tells you the actual value of an investment beyond its appraisal value. To find the cap rate:
Cap rate = sales price of a comparable income property ÷ net operating income of comparable income property
- Net Operating Income (NOI) NOI is also used to determine the value of a property. It uses data from the previous year to account for the loss of rental revenue due to vacancies, maintenance and other factors. To find the NOI:
Net operating income = gross operating income – (operating expenses ÷ gross income)
- Market Value Your cap rate and net operating income can then help you to understand your market value. This will change over time based on several factors. To find market value:
Market value = net operating income ÷ capitalization rate
- Vacancy Rate This is undoubtedly a figure that you will refer to often. The vacancy rate is the number of unoccupied units compared to the number of units available for rent. A lower number is better than a higher number. To find the vacancy rate:
Vacancy rate = number of unoccupied units ÷ total number of units
- Occupancy Rate Another common ratio used to understand the quantity of available units is occupancy rate. To find the occupancy rate:
Occupancy Rate = 100% – vacancy rate
- Cash on Cash Return (CoC) While depreciation is most common, CoC may help you get a better idea of the lost value of a property. To find CoC:
Cash on cash return = (NOI – Debt – Income Tax Expense) ÷ Cash Invested
- Depreciation Classic reporting will often include depreciation instead of CoC. Depreciation gives you an idea of the lost value of your property due to natural wear and tear. Depreciation is not often calculated annually. Instead, it is projected over a 27.5-year lifespan of the building.
Depreciation = (purchase price – land value) ÷ 27.5
- Net Income Multiplier This ratio depicts the amount you paid for every dollar of net operating income generated by a property in a single year. Net income multiplier gives sellers and buyers an idea of what to expect from a transaction. To find net income multiplier:
Net income multiplier = market value ÷ net operating income
- Debt Coverage Ratio The debt coverage ratio gives you a better idea of how much income your property generates by removing the money needed to cover debt. You ultimately want a ratio greater than 1.0. To find debt coverage ratio:
Debt coverage ratio = net operating income ÷ debt service
Fortunately, you and your team don’t have to crunch numbers on your own. Let your property management software do the heavy lifting for you. Explore property management solutions for small portfolios as well as asset intelligence.
