How to Calculate Cashflow, NOI, and CapRates to Prove Your Expertise!

Property managers are constantly on the lookout for ways to gain an edge in growing their clientele. But, what's the secret to winning over new clients and retaining existing ones? The answer lies in showcasing your expertise. As a property manager, you're not just a caretaker of your clients' investments; you're their strategic partner, responsible for optimizing their returns.

‍

How many times have you heard a client lament, 'I'm selling because I'm always losing money on this property'? As a property manager, you may have had your fair share of these moments, only to realize that your clients have been making money for years. The problem often boils down to a simple misunderstanding – your clients don't genuinely comprehend how well their property investments are performing.

‍

This blog is your toolkit for making the complex world of property investments comprehensible. By mastering the art of calculating crucial metrics like Cashflow, Net Operating Income (NOI), and Capitalization Rates (CapRates), you can unlock the power to prove your expertise to your clients. It's not just about managing properties; it's about managing perceptions, and guiding your clients towards the brightest possible financial future.

‍

In the following sections, we'll dive into the intricacies of these metrics and how you can use them to reveal the true performance of your clients' investments. By the end of this article, you'll be armed with the knowledge and tools you need to demonstrate that your clients' investments are not only safe but flourishing under your expert guidance.

‍

Most investors are looking to make more money with minimal effort. If you show your clients that not only do you know how to operate their properties, but also calculate the returns, they are going to be much more manageable throughout their lifetime as a client.

‍
Time for some calculations!

‍

First, let’s compare Economic Occupancy and Physical Occupancy, which seems pretty straight forward, but lets use the pie chart: 

‍

4 Rentable Apartments, 1 vacant, 2 paying $900 ($100 under market rent) and 1 paying $1000.

‍

‍

Taking into account that 3 of the 4 units are occupied, this gives you a 75% Physical Occupancy. 

‍

The market rent of the apartments is $1000 each, multiply that by the number of units and we get $4000 total potential income. 

We are only collecting $2800 a month, so dividing the actual income by potential income ($2800/$4000 = 70%) you get 70% Economic Occupancy.

‍

To get our Net Operating Income, which will get us to the Cash Flow, we need to start with the income. Gross Potential Rent (GPR) is the ideal revenue at top level prices. So in the scenario above, we would like $1000 per unit. 

‍

Lost Income includes vacancies, losses to old leases and concessions. 

‍

If you take the GPR and subtract the Lost Income, you will get your Effective Gross Income.

Add to the Effective Gross Income any Other Income, which includes any income other than rent, such as application fees, late fees, laundry income, parking rent and pet rent and this will get you your Gross Income. 

‍

The next step would be to deduct the Operating Expenses, these are the day to day expenses and often are not affected by occupancy, such as salaries, services you contract for, taxes and insurances. 

‍

Building this equation, we are now at GI - OpEx

‍

Completing this equation will get you the Net Operating Income, one step closer to a complete Cash Flow report…..

‍

Building the CFR you need to take into account Debt Services, such as the mortgage, Capital Expenses, which are higher end expenses for the community. These are capitalized meaning the dollar value is spread out over time, these are unit items (HVAC systems and water heaters), unit features (flooring and appliances), and community additions. You will deduct both Debt Services (DS) and the Capital Expenses (CapEx) to get to Cash Flow. 

‍

A very important number for investors and owners is a Cap Rate. The result of dividing the property’s NOI for the year by the current value of the property - this can be obtained by a recent sale/purchase. 

‍

The most useful aspect of a Cap Rate from an operational perspective is the predictable value associated with each dollar earned, or conversely spent at a given community - the VALUE of your work! 

‍

Three figures involved, NOI, Property Value and Cap Rate - if you have 2 you can solve for the third! 

‍

‍

If you multiply the Cap Rate by the Value you will get the NOI

If you divide the NOI by the Value you will get the Cap Rate

If you divide the NOI by the Cap Rate you will get the Value

‍

Rule of thumb: 

‍

As the Cap Rate lowers, the dollar is worth more. It’s like the size of the pieces of pie, when there are less people to divide it among. The smaller the group of friends, the bigger the slices of pie! 

‍

A Dollar at a 5% CAP is worth: $20.00

A Dollar at a 4% CAP is worth: $25.00

A Dollar at a 3.5% CAP is worth: $28.57

‍

You can increase income and value:

‍

Rent increase of $100 per month @ a 4% Cap Rate……

• $100 X 12 months = $1200 / 4% = $30,000 INCREASE in property value

‍

Adding 6 Pets at $600 added income annually & a 4% Cap Rate……

• 6 X $600 = $3600 / 4% = $90,000 INCREASE in property value. 

‍

Return on Investment (ROI) 

‍

How do you determine what to charge for improvements? How do you sell your budget ideas? Begin with the end in mind…. What ROI is acceptable to your investor/owners? 

‍

Selling a modest kitchen renovation:

               Costs are what?

                     Lighting:                                $150

                     Backsplash:                          $350

                     New Counters:                     $1000

Total:                                                     $1500

‍

Letting your owner know that this renovation will help support an increase in rent of $75 a month,

• $75/mo rent premium x 12 months = $900
• $1500 = .60 X 100 = 60% ROI

even with a $50/mo rent premium increase that will still get a 20% ROI! 

‍

Then, your investor/owner will want to know the PayBack Period, which is how long it will take, with the returns, to get their money back. 

Using the prior example of the renovation cost and rent increase $1500 / $75 (per mo) = 20 month PBP. 

‍

Now you can explain this to your clients, helping them grasp how you're putting their funds to work and demonstrating how even modest investments can yield substantial returns.

‍

But Why Do You Need to Know?

‍

As a property manager being an expert isn't just a badge of honor; it's a necessity. Winning over clients, ensuring their investments flourish, and demystifying the complexities of property performance are at the core of what we do. By arming yourself with the knowledge to calculate critical metrics such as Cash Flow, Net Operating Income (NOI), and Capitalization Rates (CapRates), you elevate your property management game to a whole new level.

‍

Imagine the scenario: your client, once mired in confusion about their investment's performance, now sees a clear path to financial success. They understand that their properties are not just secure but thriving under your expert guidance. They recognize that their investments are vehicles for wealth creation, not enigmas to be feared.

‍

The impact of this expertise is immeasurable. Not only will you instill trust and confidence in your clients, but you'll also establish yourself as a property management authority in your market. Your clients are more likely to stay with you for the long haul and recommend your services to others. Your property management company, too, will reap the benefits of your enhanced expertise, gaining a sterling reputation and enjoying the rewards of client retention and growth.

‍

So, embrace the power of knowledge and these key metrics. Let them be your guiding light in transforming your clients' investments from mere properties into vehicles of prosperity. Remember, it's not just about managing real estate; it's about managing perceptions, fostering financial success, and guiding your clients toward the brightest possible future.

‍

Calculate, educate, and elevate – it's a formula for success that all property managers should embrace!

‍