The APOD, How You Can Evaluate Rental Property Performance In "One Glance"

An APOD is one of the most popular reports in real estate investing because it gives the real estate analyst a quick evaluation of property performance for the first year of ownership.

It would be surprising, in fact, not to encounter an APOD in the pursuit of real estate investment property because of its popularity.

The word APOD is an acronym for "Annual Property Operating Data." Namely, it serves as the real estate equivalent of an annual income and expense statement yet is more of a "snapshot" of a property's annual income and expenses.

APOD FACTS

1. Only projects property performance during the first year of ownership


2. All data reflects an annual amount


3. Ignores tax shelter consideration. Therefore an APOD reveals the cash flow before tax (CFBT) and not cash flow after tax (CFAT)
.

Nonetheless, because it does reveal income, operating expenses, net operating income, debt service, and cash flow concisely, the APOD does serve investors well as a good "first-glimpse" of the investment opportunity.

THE CONSTRUCTION

A well-constructed APOD is best for comprehension. Obviously, the clearer annual property operating data is presented the easier the determination of property performance. In truth, however, the emphasis is on correct numbers, not style. Though it may tarnish your image, you can in fact construct an APOD on a napkin as long as the numbers are meaningful.

Okay, here's the procedure.

1. Gross Scheduled Income - Show the income derived from rents. This is known as Gross Scheduled Income (or GSI), and should represent the sum of all annual rents as if the units were 100% occupied. In other words, include an annual rent even for vacant units. In this case, you can use any rent you like (perhaps a market rent) just as long as it is realistic.

2. Vacancy and Credit Loss - Show an amount for vacancy and credit loss and deduct it from the gross scheduled income to compute Effective Gross Income (or EGI).

3. Gross Operating Income - Show the income generated from other sources (if any) such as laundry income and add it to EGI to compute Gross Operating Income (or GOI).

4. Operating Expense - Show the operating expenses such as property taxes, property insurance, utilities, trash, repairs and maintenance, property management, advertising, landscaping, and so on. Do not include debt service. Compute and label as "Total Annual Operating Expenses".

5. Net Operating Income - Deduct Annual Operating Expenses from GOI to compute Net Operating Income (NOI).

6. Cash Flow - Deduct the annual debt service (mortgage payment) from NOI to compute Cash Flow (which in this case is the cash flow before tax, or CFBT)).



Here's a tip. For good measure, you might want to add a computation for cap rate, gross rent multiplier, and cash on cash return. This is not necessary, but it does create an APOD that will make you proud to present to customers and lenders.