Using the APOD to Evaluate Rental Property Performance

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

In this article, we’ll 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 used during real estate investment return analysis.

To start with, understand that 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 stems from the fact that it gives an analyst a good first look at a property because it projects income and expenses in just twelve months. Therefore, it acts as a “snapshot” of the property’s financial performance. When you look at the statement, you see the income, operating expenses, debt service (mortgage payment), and cash flow for 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 property operating data statement, unlike other income and expense statements commonly associated with investment real estate analysis, is typically constructed on a single page.

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

The point 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 in a quick and understandable way what cash flow an income property could generate after the first year of ownership.

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

APOD also does not take into account the time value of money. There are no calculations to capitalize or 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.

garbage in garbage 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 the 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 purports to do anyway, so it’s a good thing.

Ok, 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 sway a purchasing decision (and shouldn’t), but if done correctly, this one-page income and expense statement can lead a buyer to continue evaluating at what price and on what terms a purchase should be made. rental property. It will make sense as an investment. And that’s a good thing.