Tag Archives: net operating income

Jargon Explained

This is my version of what these terms mean. I’ll add more as I think of them or as people ask about them.

Accredited Investor

An accredited investor is one who’s individual net worth, or joint net worth with a spouse is at least $1,000,000 (not including the equity in the primary residence), OR one who had an individual income of $200,000 in each of the previous two years (or $300,000 joint income with a spouse), and has a reasonable expectation of the same level of income in the current year.

Blind Pool

A blind pool is an entity that collects investors’ money without specifying exactly how the money will be spent.

Cap Rate

The cap rate is the NOI divided by the sale price. Cap Rate=NOI/Sale Price. You will know two of these numbers, so you can use this equation to figure out the third.

For instance, if your sale price is $1M and the NOI is $100K, the cap rate is 100,00 divided by 1 million. That’s a cap rate of 10.

If you have the same million dollars in the bank instead of your property, and you are getting 10% on your money (unlikely today), you’ve got the equivalent of a 10 cap.

Here’s how to use the cap rate to figure your offer price when you buy. YOU determine what cap rate you’ll accept. Your number will be determined by the local market conditions, the condition and type of property, and the apparent motivation of the seller.

Let’s say you’re looking at an apartment that’s listed for $1.5M. You are looking for a building you can buy at a 9 cap. The seller gives you his latest P&L statement, so you can total his income and expenses. From that you determine his NOI is $100,000. Using our algebra jujitsu on the formula above, we rewrite it so that Sale Price=NOI/Cap Rate. Putting in our numbers, we get Sale (Offer) Price=100,000/.09. That comes to $1,111,111. Depending on the market and the seller’s disposition, that may or may not fly.

If you want to find out what cap rate he thinks it’s worth, just go back to the original equation: Cap Rate=NOI/Sale Price. He’s given you the last two, so you can plug those in to get the cap rate. Cap Rate=100,000/1,500,000=.066=6.7%. Since you’re off by this much, it may be tough to get him to agree to your terms.

The cap rate is also an indication of the amount of risk involved in the deal. Imagine owning a stand-alone building that is leased to Walgreens for 15 years, with the national headquarters paying for the utilities, taxes, maintenance, etc. This would be a very safe investment for you, so you would not expect to get a huge return. Your cap rate might be near 5 for a deal like this.

On the other hand, imagine owning the strip mall across the street. It has a Blackjack Pizza, a laundromat, a beauty parlor, a tattoo shop, a pawn shop and two empty store fronts. One lease has three years left on it, one shop has a one year lease, and the rest are on month-to-month leases. This would be a much riskier proposition, so you would demand a much higher return on your money. Therefore the cap rate would have to be much higher to get you interested in purchasing this property.

Economic Vacancy

Vacancy is simply the percentage of currently empty units compared to the total number available. So if you have a 100 unit apartment and 9 are empty, you have a 9% vacancy rate. You can use this number to see the trend of your own property or to compare it to the local average for similar properties.

Economic vacancy, on the other hand, reveals how much money you’re losing from those empty units, and includes reduced rents collected because of move-in specials, lowered lease rates, etc.

For example, let’s say you have 100 units, all renting for $500 per month. If you had no vacancy at all, you would be collecting $50,000 per month. This is your theoretical maximum without raising the rent.

Now, if you have 9 vacancies, you would expect to collect 91 x $500 or $45,500 in that month. Your economic vacancy would still be 9% because you are 9% short of your maximum income.

However, if you have given 10 renters a $100 move-in special that month to get up to the 91 units filled, you will still have 9% vacancy, but your economic vacancy will be greater.

Let’s see how this computes. Your total income from rent in this month will be 81 full-rent units at $500 each, which brings in $40,500. The ten renters who got the $100 deal will bring you another $1,000. So your total received is $41,500, or $8,500 short of your theoretical maximum of $50,000. $8,500 is 17% of $50,000, so your economic vacancy for this month is 17%.

Therefore, when doing your due diligence, you must distinguish between the two types of vacancy. You can bet the seller will only give you the number that best makes his case, so you have to dig a little deeper to determine your true economic vacancy.

MAP Lender

MAP stands for Multifamily Accelerated Processing. Here is what HUD has to say about this program:

MAP is a national “fast track” processing system for the FHA multifamily mortgage
insurance programs. It provides a standard system to replace the varying “fast-track”
systems used in many, but not all, HUD Multifamily Hubs and Program Centers. MAP
makes the lender responsible for preparation of most of the exhibits, such as the appraisal required for an application for mortgage insurance, and for making a recommendation to HUD based upon the Lender’s processing and underwriting. HUD reviews the Lender’s exhibits and makes the final underwriting decision.


The NOI is the Net Operating Income. It’s what you have left after you’ve paid all your expenses except for the mortgage. You arrive at the number by taking your gross income and subtracting out all the expenses it takes to run the property.

Since this number partially determines the cap rate, which is linked to the price, it might not surprise you to know that the seller will give you one number and you will find another when you do the math yourself. Funny how that works….

Reg D

Regulation D, better known as Reg D, is a regulation of the Securities and Exchange Commission (SEC) that allows a syndicator to sell securities without registering them with the SEC. In general, an exemption from registration is allowed if proper disclosures and notifications are made, and if there is no general solicitation.