# Demystifying NOI, Cap Rate, and NOI Multiplier

Commercial Real Estate Agent with Rose City Commercial Real Estate

My friend Doug Foley, CCIM was kind enough to permit me to co-host a portion of the Northwest Real Estate Investor's Association (NWREIA) August Multifamily Focus Group on August 18th. I thought that a review of the basics might be a good start...so I included a brief overview of NOI, CAP Rate, and NOI, CAP, and NOI Multiplier.  While these are offered in the context of a multifamily discussion, they are basics that apply to all investment properties.

What is NOI?: Net Operating income

What does it measure?: Measures the revenue generating capacity from operations.

When is it important?: Two times: When you is sellin'...and when you aint. On a more serious note, NOI is the source of payment for debt service, and cash flow distributions to the owners.

What's the formula?: Current Revenue - Current Expenses (Exclude debt service, capital expenses.)

Example: Current Revenue, June 2009: \$100,000.
Current Expenses, June 2009: \$ 35,000.
NOI, June 2009 \$65,000.

What is Cap Rate?

The capitalization rate is what the yield as a percentage of the initial investment would be in year one if you acquired the property all cash.

Why it is important: First "sniff test" investors use to check out an available commercial property. Measures the size of the revenue producing engine.

What is the formula? NOI/Sale Price = Cap Rate
Example: \$65,000/\$812,500= 8%.

What is NOI Multiplier? How much each dollar of NOI would contribute to value if property was for sale.

Why we care: Knowing how much each dollar on NOI is worth helps us evaluate the impact of incremental increases in revenue and expense. (Great for rehab/repositioning!)

What's the formula? Sale Price/NOI = NOI Multiplier
Example: \$812,500/\$65,000= 12.50 (Each dollar of NOI creates \$12.50 of value.)

NOI, CAP, and NOI Multiplier Problems

Property X had the following revenues in 2008:

· Rent \$122,500.

· Extraordinary gain: harvest lumber on property \$25,000.

• Pet rent \$300.

Property X had the paid the following in 2008:

· Utilities, taxes, management fees, etc. \$48,000.

· Cap Ex: Completely rebuild lower parking lot \$19,000.

• Re-stripe upper parking lot \$125.

QUESTIONS 1 & 2 are based on the information above.

1. What was NOI?

2. What is the asset worth if we assume a 6.9 Cap% ?

QUESTIONS 3 - 4 are based on repositioning an 18 unit property we are buying for \$1,200,000 at an 8 cap with a 5.9 % loan. Current Annual NOI is \$96,000:

3. How much is each dollar of NOI worth?

4. How much more would the property be worth if we could raise the rents in 10 of the units \$10/month? (Assume that a year has 12 months, all the units are increased at the same time for the full year...and that we could do this without increasing expenses...without any change in turnover.)