admin Posted on 6:42 pm

Using the APOD to Evaluate Rental Property Performance

A statement of real estate income and expenses commonly used by investors as a guide in evaluating rental property performance is the property’s annual operating data, or APOD.

In this article, we’ll take a look at the APOD and consider what it can reveal about a property, how it’s built, its strengths and weaknesses, and when it’s best to use it during real estate investment profitability analysis.

To begin with, understand that just as the name annual property operating data implies, all financial data in an APOD is annualized. So when we refer to income, expenses, mortgage payment, and cash flow, we are talking about an annual amount.

What the statement reveals

The popularity of an APOD lies in the fact that it gives an analyst a good first look at a property by projecting income and expenses in just twelve months. Therefore, it acts as a “snapshot” of the financial performance of the property. When you look at the statement, you see income, operating expenses, debt service (mortgage payment), and cash flow from a rental property instantly.

Of course, all of this financial data is assumed (it may or may not be the real story), but we’ll cover that later.

how to build

An annual statement of property operating data, unlike other income and expense statements commonly associated with investment real estate analysis, is typically constructed on a single page.

It will show gross scheduled income (income generated by rentals at 100% occupancy), vacancy allowance (loss due to vacancy), other income (such as income generated by coin-operated laundry facilities), operating expenses (itemized and total) , debt service and cash flow without going through two or three pages.

The purpose of the data is simple: revenue minus operating expenses minus mortgage payment equals cash flow.

Pros and cons

As stated, one of the essential advantages of an APOD is that it can tell you quickly and understandably what cash flow an income property could generate after the first year of ownership.

On the other hand, it does not include any element of a tax haven. It won’t show you what cash flow you might expect to receive after paying taxes, or what your taxable profit or loss might be due to owning the property. An annual operating property data return simply does not calculate or reveal tax issues.

The APOD also does not take into account the time value of money. There are no calculations neither to capitalize nor to discount; The cash flow you assume in twelve months simply represents what a dollar is worth today, not how much less it might be worth next year, perhaps after inflation.

trash in trash out

Of course, like any report used to assess the financial performance of real estate investments, an APOD is only as good as its data. Income, expense, and mortgage figures must be accurate (or at least reasonable) for cash flow to be accurate and/or reasonable.

As a result, no prudent real estate investor would ever base an investment decision solely on a property’s annual operating statement and, in fact, would undoubtedly have more questions about the property after viewing the report than satisfactory answers. But this is what any preliminary information on an investment property is intended to do anyway, so it’s a good thing.

Okay, so when is the best time to present an APOD to a potential buyer? Include it in your initial presentation. As noted, it may not influence a purchase decision (and it shouldn’t), but if done correctly, this one-page statement of income and expenses can cause a buyer to continue to evaluate at what price and on what terms a rental property. it will make sense as an investment. And that’s a good thing.

Leave a Reply

Your email address will not be published. Required fields are marked *