1. Net Operating Income (NOI)  

What is Net Operating Income (NOI)?  

Net Operating Income or NOI is the annual revenue a property generates after all operating expenses have been taken into account but before taxes (aside from property taxes) are subtracted.  

Property’s Gross IncomeOperating Expenses = NOI  

Here is an example:  

If an RV Park is generating $120,00 from seasonal bookings, $10,000 from nightly bookings, and $5,000 from its general store then the total annual revenue for the park would be $135,000. 

$120,000 + $10,000 + $5,000 = 135,000 

The park also has $2,000 of yearly maintenance costs, $15,000 of payroll expenses, $2,200 in property taxes, and $3,000 of insurance costs.  

$2,000 + $15,000 + $2,200 + $3,000 = $22,200 

The RV park’s NOI would be: 

$135,000$22,200 = 112,800 

How is Net Operating Income (NOI) used? 

NOI is used for a myriad of purposes: 

  • Investors use NOI to determine the current value of the property and if the investment property could be profitable with future renovations, management expenses, and loan service  
  • Lenders use NOI when calculating the debt coverage ratio (DCR) and determining their willingness to extend a loan for the project
  • Sellers use it as the main marker in their OM to show the profitability of their property during the sale

    2. Accredited Investor 

    What is an accredited investor?

    An accredited investor is an investor who meets the SEC requirements [1] for income or net worth including meeting one of the following criteria:  

      • Net worth over $1 million, excluding primary residence (individually or with spouse or partner) 
      • Income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years, and reasonably expects the same for the current year

    What does being an accredited investor allow you to do? 

    Most security offerings, private equity, hedge funds, and syndications only allow accredited investors to participate in their offerings. Categorizing accredited investors helps the SEC prevent inexperienced and uninformed investors from being taken advantage of and to protect those ill-equipped to handle greater financial risk.  

    3. Internal Rate of Return (IRR) 

    What is internal rate of return (IRR)?

    Internal rate of return is financial metric, usually represented as a percentage, that uses the time value of money to compute the annualized rate of return for an asset over a specific period of investment

    How internal rate of return (IRR) used?

    IRR is used to determine an investment’s annual rate of return which can be particularly useful when cash inflows and outflows vary from period to period over the life of an investment. IRR allows investors to essentially smooth out the lumpiness in cash flows to understand the annual rate of return of a particular investment and to compare this return with other investments that may too have irregular cash flows.

    4. Capital Call

    What is a capital call?

    A capital call is a legally enforceable ask from a private equity entity to their limited partners (i.e., investors) for a portion or full amount of the committed capital to be transferred to the fund.

    How is a capital call used?

    Fund managers regularly use capital calls to use on an as-needed basis to collect capital when an asset needs funding. Capital calls usually facilitate purchasing new investments or carrying out strategic project initiatives at specific assets.   

    5. Capitalization Rate 

    What is a capitalization rate?

    The capitalization rate or cap rate is a formula for dividing the property’s market value by the current operating expressed in a percentage.  

     Net Operating Income / Asset Market Value = Cap Rate  

    Here is an example: 

    If an investment property reports an annual NOI of $450,000 and its assumed market value is $6,000,000 then the property’s cap rate is 7.5%.  

      How is a capitalization rate used?

      A cap rate is a metric to assess an investment property’s potential profitability and return before bringing in mortgage financing. In other words, investors use it to determine their potential initial yield. 

      6. Equity Multiple

      What is an equity multiple? 

      An equity multiple is a ratio showing the total cash distribution received divided by the total equity invested. 

      Total Profit / Total Value of initial investment = Equity Multiple  

      How is an equity multiple used?

      An equity multiple is used to evaluate the total earning power over the full lifecycle of an investment in relation to the amount of capital invested, without regard for the length of the investment period.  

       Here is an example:   

       If an offering projects an equity multiple of 2.50x the investment would return $2.50 on every $1.00 invested for the full period of the investment (I.e., not on an annual basis). 

      7. Cash on Cash Return (COC)

      What is a cash on cash return (COC)?

      A cash-on-cash return is a ratio showing the total cash earned (before taxes) to the total capital invested.  

      Annual Pre-Tax Cash Flow / Total Cash Invested into the Property = COC 

      Here is an example:

      An investor purchased a 20-door apartment complex for $2M with a downpayment of $400,000 and $10,000 in closing costs.  

       The complex achieved a rental rate of $1,000 /unit/month and maintained an 80% occupancy rate, earning $192,000 of annual rental revenue The apartment complex is also earning $2,000 in parking fees and $1,000 from laundry services.  

       Annual Gross Revenue = ($192,000 + $2,000 + $1,000) = $195,000 

       The annual property management fee is $9,000, the annual maintenance fees are $20,000 the annual insurance premium costs $5,000, the property pays $4,000 in property taxes, and the annual mortgage payment is $130,000.  

       Annual Cash Outflow: ($9,000 + $20,000 + $5,000 + $4,000 + $130,000) = $168,000  

       Annual Pre-Tax Cashflow: $195,000 $168,000 = $27,000 (annual cash inflow-annual cash outflow) 

       $27,000 / $410,000 = 6.59%* 

       *expected first year cash on cash return  

      How is a cash on cash return used?

      • Cash on cash returns are usually shown in percentages to determine the annual cash flow back to the investment entity.  
      • Investors often use COC as a metric to determine future cash yield potential. 

      8. Preferred Return 

      What is a preferred return?

      A preferred return is a profit distribution structure in which a minimum return must be distributed before the sponsor can collect a performance fee. 

      How is a preferred return used? 

      Private equity groups often use preferred return structures to create a high level of confidence in the investment and to be incentivized to make the investment as high-yielding as possible to ensure a sponsor return.

      9. Pro Forma

      What is a pro forma?

      A pro forma is a financial statement that documents a property’s key financial metrics, including but not limited to NOI, cash flows, operating expenses, improvement costs, and rental rates.

      How is a proforma used?

      A pro forma is used by investors to project potential future profit on an asset. Investors use the specified assumptions and financial metrics to forecast how changes in assumptions affect financial performance.

      10. Return on Investment (ROI 

      What is Return on Investment (ROI)?

      Return on Investment (ROI) is the net value of returns produced by an investment divided by its cost, usually expressed as a percentage.  

       ROI = Net Return of Investment / Total Cost of Investment 

       Here is an example:  

       An investor buys a property valued at $500,000. They pay a $100,000 down payment and $5,000 in closing costs. They also pay $12,000 for upgrades and renovations.  

       Their monthly mortgage payment is $1,900 or $22,800 annually 

       The investor rents the property for $3,000 a month or $36,000 a year. They spend $1,000 on insurance costs and $500 on maintenance costs annually.  

       The property’s net return for the year would be:  

       $36,000 – ($22,800 + $1,000 + $500) = $11,700  

       The property’s ROI would be: 

       $11,700/ $117,000 = 10%  

      How is Return on Investment (ROI) used?

        ROI is used as a metric for evaluating an investment’s ability to produce returns in relation to the capital allocated to the investment.