Income Property Terms and Calculations

If you are in the market for a duplex, triplex, fourplex, or 5+ unit multi-family investment property, you have undoubtedly come across these terms. To further familiarize yourself with income property, here are some key terms you should know.

Gross Scheduled Income (GSI):

Gross Scheduled Income is the gross annual rental income of an investment property assuming that all units are 100% occupied and payments are received on time. To calculate the GSI of an income property, use this formula: [Number of Units] x [Monthly Rent per Unit] x 12 [Months in a Year] = GSI. For example, to calculate the GSI for a triplex with two units rented at $1,000/month and one unit rented at $800/month: 2 x $1,000 x 12 = $24,000; 1 x $800 x 12 = $9,600; total GSI = $33,600

GSI = [Number of Units] x [Monthly Rent per Unit] x 12 [Months in a Year]

Vacancy Rate (VACANCY):

The vacancy rate is the percentage of all available units in a rental property that are vacant or unoccupied at a particular time.

Gross Adjusted Income (GAI):

Gross Adjusted Income is the Gross Scheduled Income minus Vacancy Loss. Vacancy Loss is most commonly expressed as a percentage of the Gross Scheduled Income. For example, Gross Scheduled Income for a property was $33,600. During the last 12 months, one of the $800/month units was vacant for two month. $800 + $800 = $1,600. $1,600 / $33,600 = 5%. The Gross Adjusted Income would be $32,000 ($33,600 - $1,600(5%) = $32,000. 

GAI = GSI - Vacancy Loss(%)

Net Operating Income (NOI):

Net Operating Income is an investment property's gross annual income after operating expenses are deducted. NOI determines the overall value of an investment property.

NOI = GAI – Operating Expenses

Capitalization Rate (Cap Rate):

Capitalization Rate is the annual return on an income property based on the property's expected income. To calculate a property's Cap Rate, use this formula: Net Operating Income / Sale Price = Cap Rate. For example, suppose you purchase an income property for $870,000 and it generates a Net Operating Income of $90,000. This is how you would calculate your Cap Rate: $90,000 / $870,000 = 0.10, or a Cap Rate of 10%. The higher the Cap Rate of a property, the higher the return for the investor.

Cap. Rate = NOI / Sales Price

Gross Rent Multiplier (GRM):

Gross Rent Multiplier is a ratio used to measure the cost of an investment property to its gross annual rental income. To find the GRM of a property, use this formula: Property Sale Price / Annual Gross Scheduled Income = GRM. Expenses such as utilities, vacancies, maintenance, insurance and property taxes are not included in this calculation. To find the approximate value of a property, use this formula: GRM x Annual Gross Scheduled Income = Property Sale Price. GRM is used to assess a property’s value by comparing it with similar, recently sold income properties. The lower the GRM of a property, the higher the return for the investor.

GRM = Sale Price / Annual Gross Scheduled Income

Putting it all together:

• Purchase Price: $400,000
• Total Monthly Income: $2,800 ($1,000 + $1,000 + $800)
• Gross Scheduled Income: $33,600 ($2,800 x 12 months)
• Vacancy Rate: 5%
• Gross Adjusted Income: $32,000 ($33,600 - 5%)
• Operating Expenses: $8000 
• Net Operating Income: $24,000 ($32,000 - $8,000)
• Cap Rate: 6% ($24,000 / $400,000)
• Gross Rent Multiplier: 12 ($400,000 / $33,600)

 Note: There are often more variables to consider such as maintenance, repairs, property management, etc. This example is for basic understanding. Should you find a property you are interested in, our advisers will gather all information available and assist you with putting together an accurate pro forma and records due diligence.