Delta between future income and expenses

[Vlad Denisov]

Let's say we underwrite a deal and we think 3% growth  in Gross Operating Income and 2% growth in opEx are reasonable. 

Because of this delta, NOI increases every year and Cap Rate as a result. But NOI can't grow infinitely over time, right? What are the reasons this process stop and when should we expect it to stop?

[Nick B.]

Inflation, just like tidal wave, lifts all boats. 3% NOI gain would translate into 3% value gain provided market cap rate (investor appetite) stays the same. If the market cap rate changes so will the value.

My 12% was based on the original price and new NOI. If the market cap rate is still 5% after 30 years that property will be worth 2.43 times more in inflated dollars.

Of course the purchase power of these dollars will be 2.43 times less, thus making a real gain on this property to be nothing. (3% inflation means that $1 today has the same purchase power as $2.43 will have 30 years from now)

If you want to have a real capital gain, your NOI has to outpace inflation while market cap rate has to stay the same as at the purchase time.

For all practical purpose, very few people hold apartments for 30 years and NOI grows faster than inflation because of the value-add.