Income and expenses determine a property's value.
Rental properties are evaluated by calculating various metrics, such as:

Net Operating Income (NOI) is the total income generated by a property, minus operating expenses (excluding debt service), which indicates its profitability.
Formula: Net Operating Income = Gross Annual Income - Annual Operating Expenses (excluding debt service)

Capitalization Rate (CAP rate) indicates the expected rate of return from a rental property. The CAP rate represents the yield of a property over one year, assuming it is purchased with cash. If the CAP rate is lower than comparable properties, it suggests that the property is priced higher than the rest of the market.
Formula: Capitalization Rate = Net Operating Income (NOI) / Property Value

Gross Rent Multiplier (GRM) values rental properties based on the annual rent collected by the building, before deducting any taxes, insurance, utilities, or other associated expenses. The advantages of the GRM metric is its simplicity and speed of calculation. However, a significant drawback is that it does not account for operating expenses. A lower GRM indicates a better value.
Formula: Gross Rent Multiplier = Property Value / Gross Annual Income

Cash-on-Cash (cash yield) measures cash flow relative to the cash invested in a property and is calculated on a pre-tax basis. Closing cost must be input for this metric to be accurate.
Formula: Cash-on-Cash Return = NOI + Debt Service / Total Cash Invested

Our Property Comparison Tool provides quick and clear comparisons for properties you are considering. More importantly, you can utilize the tool to demonstrate the potential impact of adjustments you might implement. Adjust cost, loan terms, expenses, down payment, and income to evaluate how a building will perform with your proposed plan.

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