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Posted on April 30, 2016 by Bush Johnson in Property Management

April 20, 2016

The number one goal when investing in multifamily real estate and to explode your wealth is to increase the Net Operating Income (NOI).  Let me quickly define NOI as the total gross revenue subtracted by the operating expenses of a property.  When an investor analyzes an asset, he will typically use NOI and cap rates to determine value.  A cap rate is simply the rate of return on an asset based on income.  The higher the NOI, the higher the value of the asset

How do you calculate value with cap rates?  Let me show you a quick calculation.  Let’s assume the NOI of a property is \$100,000 and the prevailing market cap rate is 10.  You would take the NOI and divide the cap rate to obtain the market value.  Thus \$100,000/.10 = \$1,000,000 value.  Market value and cap rates have an inverse relationship.  As cap rates lower, values rise and vice versa. If the NOI on the same property increased to \$120,000, the value of the asset at a 10 cap would increase to \$1,200,000.  As you can see, a \$20,000 increase in the NOI boosts the value of the property by \$200,000.  Your focus is to expand the NOI by either expanding the revenue or decreasing the expenses of the property.  Let us show you our three-step framework on achieving this goal.  (Your broker should be able to tell you cap rates in their market)