What’s included in ‘Net Income’ for Cap Rate analysis?

[Robert Lindsley]

Hello,

I’m trying to determine a price for a multifamily apartment building I’m selling. The way I’m doing this is taking the net income and determining a possible sales price using the cap rate.

Normally to determine net income I start with the gross income and subtract taxes, insurance, and maintenance. However in this case I pay the electricity for the tenants. Should I also subtract my electrical costs from my gross income to determine net income? What is the common methodology of figuring out net income given I pay electricity?

Thanks!

Robert.

[Sam Grooms]

You'll want to use Net Operating Income in your calculation, not Net Income. Include all revenue, minus all operating expenses. Basically, everything except for debt service and any other non-operating expenses. 

It's a very small subset of buyers that determine their office pric purely based on a cap rate. Small multifamily mostly gets valued based on comps, even over 5+ units. Large multifamily and/or sophisticated investors price based on their required returns.