It is common to pay professional property managers a percentage of collected rent, so for this example you’ll assume that 5% of the gross operating income (GOI) is a fair amount to add to your APOD as the value of that service.

Capital additions are additions having a useful life of more than one year or improvements that are likely to prolong the life of the property. A capital addition is different from a repair, which maintains rather than increases the life of a property.

Your attention is drawn, however, to an expense category you haven’t seen before: lawn/snow. This example contains a lesson that is as important as it is simple. You may focus so intently on the information that is provided that you may easily forget to notice the information that is missing. It’s not enough just to evaluate the expense figures, as

For example, utilities, supplies, snow removal, and property management are all operating expenses. Repairs and maintenance are operating expenses, but improvements and additions are not—they are capital expenditures. Property tax is an operating expense, but your personal income tax liability generated by owning the property is not. Your mortgage

The downside to the capitalization rate, however, is the same as with most of the others we’ve considered so far. It looks at the property at a point in time (usually the current year) without regard to the property’s expected performance over your entire holding period. It can certainly be useful to look at a single point in time—what’s a reasonab

Your expense percentages may not tell you very much in an isolated example, but they might shed a good deal of light if you could compare them to some reasonable expectations.

Top-down calculation: Net Operating Income less Mortgage Interest less Depreciation, Real Property less Depreciation, Capital Additions less Amortization, Points and Closing Costs plus Interest Earned = Taxable Income

You can ask the real estate broker who is trying to sell you this property. He or she may have compiled data on similar buildings in the area and should certainly be interested in giving you the data you need to make an informed decision to buy. You might talk to a property manager in the area, someone who would have firsthand experience with the c

A cousin to the cash flow measures is the gross rent multiplier (GRM). GRM is a method of estimating or expressing a property’s value as a multiple of its gross rental income. Gross Rent Multiplier = Market Value / Gross Scheduled Income (annual) By transposing this equation, we also get: Market Value = Gross Rent Multiplier × Gross Scheduled Incom