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 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]
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 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 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 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 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
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.
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