Multifamily: Evaluate the Rental Business

Understand the income

A rent roll is a list of units, rents and occupancy. Compare it with leases and actual collections. A fully occupied property can still collect less than the amount shown on paper.

Learn net operating income

Net operating income, or NOI, generally means property income after operating expenses and before loan payments and income taxes. Major capital improvements are generally considered separately. Verify what the analysis includes rather than treating a seller’s NOI as a settled fact.

How income relates to value

One valuation approach relates annual NOI to a market-supported capitalization rate, or cap rate. In a simplified calculation, value equals NOI divided by the cap rate. This is one approach, not a guaranteed sale price. Property condition, comparable transactions and the quality of the income still matter.

Your quick checklist

• Compare the rent roll with collections.
• Review actual expenses and likely changes.
• Identify repairs and replacements that are needed.
• Distinguish NOI from cash remaining after loan payments.