As you buy and sell apartment buildings, there are many financial indicators that you should be familiar with in order to help you make the best financial decision. Here are the top 8 financial indicators in multifamily real estate that ever investor should know:
1. Gross Scheduled Income (GSI) – The GSI is the expected rent/income that is collected in one year. This is calculated by adding the 12 months of rent.
2. Net Operating Income (NOI) – The NOI is the actual income minus expenses not including debt service.
Calculation: GSI – Operating Expense
3. Capitalization (Cap) Rate – This is the rate of return on a real estate investment property based on the income that the property is expected to generate. It is expressed as a percentage. The higher the CAP rate, the better the investment.
Calculation: (NOI ÷ Price) x 100
4. Gross Rent Multiplier (GRM) – The GRM is the number of years the property would take to pay for itself in gross received rent. The lower the GRM, the better the deal.
Calculation: (Price ÷ GSI)
5. Upside in Rental Income – This is used for properties that have rents that are lower than market rent. It uses the pro-forma rents to show the property potential. The higher the percentage, the better.
Calculation: [(Pro-forma GSI – Actual GSI) ÷ Actual GSI] x 100
6. Cash-on-Cash Return – This ratio is used to show the annual pre-tax cash flow to the total amount of cash invested.
Calculation: NOI ÷ Cash Invested
7. Return on Equity (ROE) – This measures the profitability. It is the amount of net income returned as a percentage of shareholder equity.
Calculation: NOI ÷ Estimated Net Equity
8. Debt Coverage Ratio (DCR) – This is the cash flow currently available to pay debts.
Calculation: NOI ÷ Debt Service
In order to make the best investments or to sell your property at the highest price, investors should calculate the ratios mentioned above to ensure that the property is the best investment. If you have any problems with any of these calculations or if you want to learn about ways to position your property better, please reach out to us!