Why Real Estate Investors Like The APOD
The APOD, an acronym for Annual Property Operating Data, is arguably one of the most popular real estate analysis reports used by real estate brokers, investors and others engaged in real estate investing.
Considered by many as an equivalent to an income property's annual income and expense statement, the APOD presents the bottom-line cash flow, rates of return and profitability in one concise and easy-to-read report.
As a result, analysts are able to get a good "first-glimpse" at a rental investment property's income, operating expenses, net operating income, debt service, and cash flow quickly and easily enough to make some preliminary decisions about the property.
In this article I want to show those of you who are new to real estate investing the characteristics and structure of the APOD because you most certainly will be confronted by one sooner or later. Plus, it will benefit you to learn how to create one for your own real estate evaluations.
As the name "annual property operating data" implies, the report concerns the rental property's "annual" financial performance. But bear in mind that it also only concerns the property's financial performance for the first year.
In other words, unlike a Proforma Income Statement which provides financial statistics of how the investment might perform over future years of ownership, the APOD provides real estate investors a "snapshot" of the investment's operating data merely during the first twelve months of ownership.
This annual property operating data report, then, is not intended to give investors enough data to make a final real estate investment decision; in fact it ignores the elements of tax shelter and time value which are both important to most sound investment decisions.
Nonetheless, throughout my years as a realtor, real estate investors I worked with regularly expected to see this report to make initial investment decisions and therefore qualifies as a most-have report for anyone engaged in real estate investing.
There are four components of the investment's annual property operating data that essentially comprise an APOD.
- Rental income
- Operating expenses
- Mortgage payment
- Cash flow
Okay, now let's break it down so you can see how these components are presented. I've also provided a sample report at the right that you can enlarge and preview.
- Gross Scheduled Income (GSI) - This is the sum of all annual rents as if the units were 100% occupied. Apply any rent you wish to units that are vacant (perhaps a market rent). The idea is to show the potential income when all units are rented and all rent collected.
- Vacancy and Credit Loss - The potential rental income lost due to unoccupied units or nonpayment of rent by the tenants. I recommend nothing less than 5%.
- Effective Gross Income (EGI) - This is gross scheduled income reduced by vacancy allowance and represents the amount of rental income you realistically expect the asset to generate.
- Other Income - The amount of income (if any) you expect can be collected from other sources such as coin-operated washers and dryers, storage rooms, garages and so on.
- Gross Operating Income (GOI) - The actual amount of income available for you to start paying the bills.
- Operating Expenses - The expenses required to keep the rental property in service such as property taxes, property insurance, utilities, trash, repairs and maintenance, property management and so on.
- Net Operating Income (NOI) - The amount of income that remains to service the debt once all the operating expenses are paid .
- Debt Service - The annual total of all mortgage payments.
- Cash Flow - The cash available after all cash inflows are reduced by all cash outflows. In this case it is cash flow before taxes (CFBT) which means it is money still subject to the owner's income tax liability.
Rule of Thumb
The APOD is not perfect. It only evaluates the first year of a rental property's annual property operating data and does not include consideration for tax shelter or time value of money. Nonetheless, when populated with accurate and realistic numbers it will provide real estate investors with a concise and easy-to-read report that will benefit initial real estate.
So You Know
ProAPOD's three real estate investing software solutions each create an APOD as illustrated in the sample above. You can learn more about all the reports and features provided by my software at www.proapod.com