Real Estate Investor · Orlando, FL · Member since 2016 · 185 posts · 53 votes
Hello,
I’m trying to determine a price for a multifamily apartment building I’m selling. The way I’m doing this is taking the net income and determining a possible sales price using the cap rate.
Normally to determine net income I start with the gross income and subtract taxes, insurance, and maintenance. However in this case I pay the electricity for the tenants. Should I also subtract my electrical costs from my gross income to determine net income? What is the common methodology of figuring out net income given I pay electricity?
Investor · Phoenix, AZ · Member since 2017 · 583 posts · 919 votes
7y
You'll want to use Net Operating Income in your calculation, not Net Income. Include all revenue, minus all operating expenses. Basically, everything except for debt service and any other non-operating expenses.
It's a very small subset of buyers that determine their office pric purely based on a cap rate. Small multifamily mostly gets valued based on comps, even over 5+ units. Large multifamily and/or sophisticated investors price based on their required returns.
Investor · Phoenix, AZ · Member since 2017 · 583 posts · 919 votes
7y
You'll want to use Net Operating Income in your calculation, not Net Income. Include all revenue, minus all operating expenses. Basically, everything except for debt service and any other non-operating expenses.
It's a very small subset of buyers that determine their office pric purely based on a cap rate. Small multifamily mostly gets valued based on comps, even over 5+ units. Large multifamily and/or sophisticated investors price based on their required returns.
Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
7y
@Robert Lindsley since you are competing with brokers and how they calculate 'net income' you need to match their methods. Leave out any amounts for vacancies, PM, capex, repairs and maintenance. Generally they omit water and sewer as well. Just look at some of their listings and you will get the hang of it.
It is harder to do it wrong on purpose when you know how it should be done. ;<))
I’m trying to determine a price for a multifamily apartment building I’m selling. The way I’m doing this is taking the net income and determining a possible sales price using the cap rate.
Normally to determine net income I start with the gross income and subtract taxes, insurance, and maintenance. However in this case I pay the electricity for the tenants. Should I also subtract my electrical costs from my gross income to determine net income? What is the common methodology of figuring out net income given I pay electricity?
Thanks!
Robert.
Yes you will need to include the utilities you pay for the tenants as operating costs.