NET INCOME MULTIPLIER

The Net Income Multiplier (NIM) is an important real estate investment metric and is discussed in the e-book Real Estate Investment Mathematics along with many other important real estate investment formulas.

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NIM is actually the reverse of the capitalization rate, and denotes how many times the asking price or market price is greater than the Net Operating Income (NOI) of the property under consideration. As Formula (3) indicates, the NIM is calculated as the ratio of property market price over the Net Operating Income.

NIM = Market Price / Net Operating Income (NOI) (3)

NOI = Effective Gross Income – Operating Expenses + Recoveries (4)

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Notice that typically commercial leases include clauses through which a significant portion of operating expenses is recovered from the tenants. Thus, the third term of Formula (4) represents the amount of operating expenses that is recovered from the tenants.

Operating expenses are the sum of the following expenses:

          Management Fee
Plus    Utilities
Plus    Supplies
Plus    Marketing
Plus    Maintenance and Repairs
Plus    Security
Plus    Salaries
Plus    Administration
Plus    Property Taxes

Example (continuing from previous):

Market Price   = $1,000,000
Effective Gross Income   = $120,000
Operating Expenses   = $35,000
Recoveries   = $15,000

Therefore,

NOI = 120,000 – 35,000 + 15,000= 100,000

and

NIM= 1,000,000/100,000 = 10

Thus, in this example, the market price is 10 times greater than the NOI produced by the property.

This is an excrept from the e-book Real Estate Investment Mathematics

Capitalization Factor

The Net Income Multiplier is equivalent to what is referred to in the valuation literature as "capitalization factor". An appraiser or an investor may use the market average Net Income Multiplier and adjust accordingly based on how much the property under consideration deviates from the average property in the market in terms of risk profile and other characteristics and then use it to come up with a rough estimate property value my multiplying the NOI the property is producing at the time of valuation by the adjusted NIM. For example, if the property under valuation produces an NOI of $100,000 and the appropriate NIM per the judgement of the valuer is 10, then the property value can be estimated as:

Property Value = NOI x NIM = 100,000 x 10 = 1,000,000

Real Estate Investment Mathematics!
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Internal Rate of Return(IRR)
The 3 Formulas for Modified IRR (MIRR)/Financial Management Rate of Return (FMRR)
Potential Gross Income Multiplier (PGIM)
Potential Gross Income
Effective Gross Income Multiplier
Effective Gross Income
Net Income Multiplier
Net Operating Income
Overall Capitalization Rate/Income Return
Capitalization Factor
Band-of-Investment Formula for Estimating a Market/Required Capitalization Rate
Theoretical-Approach Formula for Estimating a Market/Required Capitalization Rate
Appreciation Return
Total Return
Return on Total Capital (ROR)
Return on Equity (ROE)/Cash-on-Cash Return/Equity Dividend Rate
Before Tax Equity Cash Flow (BTECF)
Equity Investment
Loan Amount
Debt Service
Mortgage Constant
Payback Period
Breakeven Occupancy
After Tax Cash Flow (ATCF)
Taxable Income
One-Period IRR
Income Tax Payment in Association with Income Producing Property
Capital Gains
Formula for Cash Flow for Last Period of Analysis
Future Resale Price
Annual Rental Income of Occupied Multi-Tenant Property
Multi-Period Lease Rate Growth Formula with Intertemporally Variable CPI Forecast
Multi-period Lease Rate Growth Formula with Constant CPI Forecast
Present Value (PV)
Net Present Value (NPV)
Profitability Index

Return from Net Income Multiplier to Investment Analysis

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