NET INCOME MULTIPLIER
The Net Income Multiplier (NIM) is the reverse of the capitalization rate, and denotes how many times the asking price or market price is greater than the Net Operating Income 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) 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: Example (continuing from previous):Market Price = $1,000,000Effective 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 FactorThe 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 NIM 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
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