ABCs of Multifamily Metrics: Or How I Learned to Stop Worrying and Love the Cap Rate

[Nick Love]

Hey BiggerPockets fam! 🏢

Ever looked at multifamily metrics and thought they resembled a bowl of alphabet soup more than actual, understandable numbers? Trust me, I've been there - staring at an NOI, wondering if it was some secret society code.

But here's the fun twist! Once you decode these mystifying acronyms, they're more friendly than a grandma's Sunday lunch. And boy, can they help you make (or save) some serious dough 💰! Let’s break it down:

1. Cap Rate (Capitalization Rate): Not the cap you wear when it's sunny, folks! It's the ratio of a property's Net Operating Income (NOI) to its current market value. Think of it like this: If your property was a giant piggy bank, the cap rate tells you how much coin you're adding every year relative to its size. 🐷

   Formula: Cap Rate = NOI / Current Market Value

2. NOI (Net Operating Income): No, it's not the sound you make when someone takes the last slice of pizza. 🍕 It’s the total income from the property minus operating expenses. This little number is the heart and soul of any property's financial health.

   Formula: NOI = Gross Operating Income - Operating Expenses

3. Cash-on-Cash Return: This isn't a fancy boomerang trick. It's the return on the actual cash you invested. Say you invest $100, and by the year's end, you've made $10 from it. That's a 10% cash-on-cash return. You're welcome!

   Formula: Cash-on-Cash Return = Annual Cash Flow / Total Cash Invested

Remember, while these metrics are crucial, they're just the tip of the multifamily iceberg. There’s a lot more beneath the surface. But now, armed with this knowledge, you're ready to dive deeper and make some waves in the multifamily pond.

So the next time someone tosses out an acronym at a networking event, give them a wink and drop some knowledge bombs. And if they're still confused, just send them over to this post. 😉

Happy investing, and may your metrics always be in your favor!