Looking to purchase an apartment complex or analyze performance on existing one? Below you will find the description and formulas for the main ratios.

Key Ratios:

  • GRM The Gross Rent Multiplier = Sales Price / Monthly Potential Gross Income         

The GRM is sometimes calculated using the effective gross income rather then the potential rental income thus incorporating the vacancy factor in the GRM calculation. 

  • The breakeven point is the lowest combination of average rents and occupancy that will provide rent revenue sufficient for a property to cover its operating expense, required capital outlays, and any proposed loan payments. Breakeven is the occupancy % needed to pay monthly costs.

The breakeven point is calculated as follows:
Breakeven = Total Costs ÷ Gross Potential Rent

  1. Net Operating Income (NOI).
NOI= effective gross income – operating expenses

Note: Effective Gross Income is the stabilized income (considering rents not collected due to vacancies, vacancies, delays in lease-up, and bad debt, and considering other income collectable from parking, laundry, commercial space, etc.) that a property is expected to generate.

  • Averages:
  • Average # sq. ft. = total sq. ft. / # units
  • Average rent $ per unit = total scheduled rent $ / # units
  • Average rent $ per sq. ft. = total scheduled rent $ / total sq. ft.
  • Average $ Rent = $ Rental Income ÷ Number of Occupied Apartments
  • Period $ Rental Income = Period $ Average Rent x Number of Units at Property x Occupancy %
  1. operating expense ratio = expenses / total revenue or operating income (typically around 40-45%)
  2. Cap Rates - A capitalization rate is the yield expected by an owner of a capital asset. A low cap rates mean investors consider the property a low risk or highly desirable property. Higher cap means more risky project.  Cap Rate = NOI / Price
  3. Value/Unit or Value/Sq. Ft -- Dollar value per apartment unit or per square foot of floor space and loan amount per unit or per square foot are used to compare estimates of value and debt to the costs of replacing the property or building a competing property.  "all in cost" means the cost of all construction, development, financing, planning, land, etc., to produce the property. If the expected cost of developing a property is greater than its value, no loan should be made and the property should not be built.
  4. LTV -- The loan-to-value ratio is used to express the amount of a proposed loan as a percentage of its value.  LTV = Loan/Value
  5. DCR (DSCR) -- The debt service coverage ratio is the relationship between the NOI and the loan payments for a given period, usually a year, and it is used to measure how much larger net operating income is than debt service.  DSCR = NOI / Loan Payment typically 1.25
  6. Loan to Cost - The loan to cost ratio is similar to the loan-to-value idea, but it is more narrowly focused on insuring that a borrower has equity (cash) invested in a deal. It is used in underwriting a construction proposal.  LTC = Loan / Total Project Cost
  7. Loan Constant = The loan constant is the percentage of a loan amount paid in principal, interest, including mortgage insurance premium (if any) in a given period, usually a year.
Loan Constant = Annual Payment / Original Loan Amt
  1. Initial Return on Investment ROI = Project Cash Flow / Initial Investment

 

 

 

 

 

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