![]() ![]() In the case of residential properties with short-term contracts, let’s say six months to one year, investors will have greater flexibility in passing the full increases in market rents to the rent paid by the tenants. For example, it will depend on how fast rental rates for comparable properties in the local market are growing and the extent to which those increases can be passed on to existing tenants of the particular property. The growth rate of the NOI of a specific property will depend on a number of factors. (3) Reduction of the operating expenses of the property (2) Reduction of the property’s vacancy rate and increase of its occupancy rate, if it is not fully occupied ![]() (1) Increases in market rents that can be passed on the rent paid by the existing tenants As such, the NOI produced by a property can grow for any of the following reasons: NOI is calculated as the gross rental income produced by the property minus operating expenses and any rent losses due to non-paying tenants. Thus, assuming that as the NOI of a property increases the cap rate remains constant, its value should be increasing. This is the case, because according to the direct income capitalization approach the value of an income-producing property is equal to the ratio of its NOI over the market cap rate appropriately adjusted to take into account the idiosyncratic characteristics of the property and its location. Secondly, all else being equal, NOI growth should result also in an increase in the value of the property. Since the increase occurs after the purchase of the property, then the income return generated by the property should rise as well. This is the case because the income return is calculated as the ratio of the NOI over the property purchase price. How Property Rents and Prices are Determined?įirstly, the increase in NOI translates immediately to an increase of the property’s income return. How to Calculate Effective Gross Rental Income ![]() Net Income Multiplier: A Better Metric than the GIM ![]()
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