Capex, Opex, NOI and more

[Matt Herbert]

I'm trying to understand how capex reserves factor into NOI, Cap Rate, Debt Service Ratio, and other metrics. Lets assume the following yearly numbers for a Single Family Residence (these numbers are made up, try not to get hung up on the minutia)

• $200,000 - Total price of property (purchase + rehab; aka ARV)
• $24,000 - Gross Income (from rents, no other income)
• $1,200 - Vacancy (5%)
• $3,000 - Property Taxes
• $1,000 - Insurance
• $1,000 - Utilities
• $2,000 - Maintenance/Repairs (1% of total property value)
• $8400 - Debt Service

As I understand things, my Operating Expenditures (Opex) will be:

      Property Taxes ($3,000) + Insurance ($1,000) + Utilities ($1,000) + Maintenance ($2,000) = $7,000

Now to calculate the Net Operating Income (NOI):

      Gross Income ($24,000)  - (Vacancy ($1,200) + Opex ($7,000)) = $15,800

Once I have my NOI, I can go on to calculate the Cap Rate (Net Operating Income / Total Price of Property = 7.9), the Debt Service Ratio (Net Operating Income / Debt Service = 1.88), etc.

What I am missing, is my capex reserves. I know someday my property will need a new roof, so I set reserves aside for each property. I typically set aside between 10% - 15% (depending on the age, condition, location, etc). I don't understand if the capex reserves should be excluded from these types of calculations, or if it should be included somehow?

Thanks

[Immanuel Sibero]

@Mark Trebor

- Capex is not part of NOI. NOI is Revenues (technically Operating Revenues) - Operating Expenses. Capital expenditures are well... "capital" not "operating" so they don't belong on any metrics that call for operating items (i.e. NOI, operating yield, etc). Another way of looking at it is operating expenses are items that are essential in "operating" the property. You can't skip out on maintenance (i.e. operating items) such as stopped up toilet. But you can defer most capital expenditures such as old roof, outdated fixtures, etc.

- Since capex is not part of NOI, it is not part of cap rate. But for single family rentals, cap rate is really not all that useful anyway. The bank does not use cap rate to value single family homes nor does anybody. The bank does not use cap rate to calculate DSR for single family homes.

- Bankers can confirm this but sometimes for commercial properties banks do include reserve for capex in NOI for purposes of calculating DSR. But again this is not relevant for single family homes.

If you're analyzing single family rentals, don't let all these fancy metrics for commercial properties cloud your analysis. Things are simpler when dealing with SFRs. CoC, 1% rule, maybe IRR are good enough.

Cheers... Immanuel