Why Real Estate Investors Like the APOD
The APOD — an acronym for Annual Property Operating Data — is arguably one of the most popular real estate analysis reports used by real estate brokers, investors and others engaged in real estate investing.
Considered by many as an equivalent to an income property's annual income and expense statement, the APOD presents the bottom-line cash flow, rates of return, and profitability in one concise and easy-to-read report.
As a result, analysts are able to get a good "first-glimpse" at a rental investment property's income, operating expenses, net operating income, debt service, and cash flow quickly and easily enough to make some preliminary decisions about the property.
In this article I want to show those of you who are new to real estate investing the characteristics and structure of the APOD because you most certainly will be confronted by one sooner or later; plus, it will benefit you to learn how to create one for your own real estate evaluations.
As the name — annual property operating data — implies, the report concerns the rental property's "annual" financial performance, which in this case, only concerns the property's financial performance for the first year.
In other words, unlike a Proforma Income Statement (the purpose of which is to provide speculations of how the investment might perform over future years of ownership) the APOD merely provides investors a "snapshot" of the investment's operating data following the first twelve months of ownership.
So this report is not intended to give investors enough data to make a final investment decision. In fact it ignores the elements of tax shelter and time value, which is important to most sound investment decisions. Throughout my years as a realtor, my investors simply used this report to initially decide whether or not the investment was worth the time and effort to pursue further.
There are four components of the investment's annual property operating data that essentially comprise an APOD.
- Rental income
- Operating expenses
- Mortgage payment
- Cash flow
Okay, now let's break it down so you can see what each component means and how they are presented.
- Gross Scheduled Income (GSI) - The sum of all annual rents as if the units were 100% occupied. Apply any rent you wish (perhaps a market rent) to units that are vacant. The idea is to show the potential when all units are rented and all rent collected.
- Vacancy and Credit Loss - The potential rental income lost do to unoccupied units or nonpayment of rent by the tenants. I recommend nothing less than 5%.
- Effective Gross Income (EGI) - This is gross scheduled income reduced by vacancy allowance and represents the amount of rental income you realistically expect the asset to generate.
- Other Income - The amount of income (if any) you expect can be collected from other sources such as coin-operated washers and dryers, storage rooms, garages and so on.
- Gross Operating Income (GOI) - The actual amount of income available for you to start paying the bills.
- Operating Expenses - The expenses required to keep the rental property in service such as property taxes, property insurance, utilities, trash, repairs and maintenance, property management and so on.
- Net Operating Income (NOI) - The amount of income remaining to service the debt once all the operating expenses are paid.
- Debt Service - The annual sum total of all mortgage payments.
- Cash Flow - The cash available after all cash inflows are reduced by all cash outflows. In this case it is cash flow before taxes (CFBT) which means it is money still subject to the owner's income tax liability.
Rule of Thumb
The APOD is not perfect because it only evaluates the first year of a rental property's annual property operating data and does not include consideration for tax shelter or time value of money. Nonetheless, when populated with accurate and realistic numbers it will provide real estate investors with a concise and easy-to-read report that will benefit initial real estate investment decisions.