Multifamily Investment Property - Questions & Answers

Q: How Is The Value Of Multifamily Investment Property Determined?

A: There is a direct relationship between your multifamily property’s net operating income (N.O.I.) and the value. The process of converting your properties income stream into value is called the “process of capitalization”. Both lenders and appraisers will take your properties net operating income make the necessary adjustments by re-constructing both income and expenses and then extract comparable sales and cap rates from the market place. This data from the marketplace is then used with your properties net operating income and converted into a value. THE OLD MYTH OF “COST PER UNIT”
just doesn’t work, when arriving at value.

Q: What Is The Difference Between A Recourse And A Non-Recourse Loan?
A: A recourse loan means the loan is guaranteed by the borrower upon default of the loan . A non-recourse loan means that if the borrower defaults for any reason, the borrower would not be responsible for the re-payment of the outstanding loan.

Q: What Is Net Operating Income (N.O.I.)?
A: The net operating income (N.O.I.) of a property is the net profit before the annual debt service (-ADS), but after all expenses have been deducted from the property’s income. The net operating income is the property’s income stream that is converted into value through “the process of capitalization”.

Q: What Is The Annual Debt Service (-ADS)?
A: The annual debt service (-ADS) is the total monthly payments made annually, in most cases made up of both principal and interest, used to service the annual expense of a mortgage.

Q: What Is A Cap Rate?
A: Cap Rate is a measurement of the rate of return on an investment. You calculate this by taking the net operating income (N.O.I.) of a property and dividing it by the purchase price. The net operating income divided by the cap rate equals value.

Q: What Is Cash Flow Before Taxes (CFBT)?
A: Potential Rental Income less vacancy and collection losses plus other income equals gross operating income less total expenses equals net operating income (N.O.I.) less annual debt service (-ADS) = cash flow before taxes.

Q: What Is Cash-On-Cash Return?
A: The cash flow before taxes that a property produces annually, divided by the initial capital (investment base) used to make the investment.

Q: What Is Debt Coverage Ratio?
A: The debt coverage ratio is the relationship between the annual debt service (-ADS) to the net operating income (N.O.I.) of a property. It is the lender’s margin of safety that a property’s debt payments can be met by the property’s income. The debt coverage ratio is the net operating income (N.O.I.) divided by the annual debt service (-ADS).

Q: What Is Economic Vacancy?
A: Apartment units that are vacant that are not available for rent, such as units that are used for a maintenance shop, models, offices, staff apartments, or cannibalized units. In addition, apartments units that are not yet occupied that appear as rented on a rent roll and occupied units that are not producing rent (i.e. delinquencies) slow pays or no pays and units that are under concession.

Q: What Is A Physical Vacancy?
A: The number of vacant units within a multifamily property that are available for rent.

Q: What Is Equity?
A: The value of one’s interest in a property is known as equity. It is determined by taking the fair market value of the property and subtracting any outstanding debt or encumbrances.

Q: What is the CEA Designation?
A: The (Certified Exchange Advisor) CEA designation, is offered through the AMERICAN INSTITUTE OF REAL ESTATE EXCHANGORS (A.I.R.E.E.). Designees receive the required education to become a problem solver and expert in the “1031” exchange arena.

Q: What Is The CCIM Designation?
A: The (Certified Commercial Investment Member) CCIM designation, is offered through the Commercial Investment Real Estate Institute and its members are known as the PhD’s of Commercial Investment Real Estate.

Q: What Is The CMIA Designation?
A: The (Certified Multifamily Investment Advisor) CMIA designation, is offered through the AMERICAN INSTITUTE OF REAL ESTATE EXCHANGORS (A.I.R.E.E.) Designees are trained in all aspects of acquisition and disposition of Multifamily Investment Property and are known as the specialists in the Multifamily Investment Brokerage arena.

Q: What Is The CPM Designation?
A: The (Certified Property Manager) CPM designation, is offered through the INSTITUTE OF REAL ESTATE MANAGEMENT (IREM). It is provided to those professionals who have distinguished themselves in the areas of education, experience and ethics in property management.

Q: What Is An Accredited Management Organization?
A: An accreditation conferred by the INSTITUTE OF REAL ESTATE MANAGEMENT (IREM) on real estate management firms that are under the direction of a CERTIFIED PROPERTY MANAGER (CPM) and comply with stipulated requirements of IREM.

Q: What Is An Accredited Residential Manager (ARM)?
A: A professional certification conferred by the INSTITUTE OF REAL ESTATE MANAGEMENT (IREM) on individuals who meet specific standards of experience, ethics, and education.

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