Revenue

Gross Rental Income

Total rent collected if every unit were occupied and paying in full. This is a theoretical maximum, not actual income.

What to question

• Are rents above current market comparisons
• Is rent growth assumed immediately or gradually

Vacancy and Credit Loss

Estimated income lost due to vacant units or unpaid rent.

What to question

• Is vacancy lower than market averages
• Does vacancy decline unrealistically over time

Other Income

Non rent income such as parking, laundry, pet fees, or storage.

What to question

• Is this income already being generated today
• Are assumptions supported by comparable properties

Effective Gross Income

Revenue after vacancy and credit loss are deducted. This is a more realistic measure of income than gross rent alone.

What to question

• Does this grow faster than local market fundamentals

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Operating Expenses

Repairs and Maintenance

Ongoing costs required to keep the property functional.

What to question

• Are expenses artificially low early in the hold
• Do costs increase over time or stay flat

Property Management

Fees paid for day to day operations, leasing, and oversight.

What to question

• Is the fee below market norms
• Are self management assumptions realistic long term

Property Taxes

Taxes assessed by local jurisdictions based on property value.

What to question

• Are post acquisition reassessments modeled
• Are tax increases capped or assumed away

Insurance

Costs to insure the property against casualty and liability.

What to question

• Are premiums consistent with recent market conditions
• Is insurance inflation reflected over the hold period

Utilities

Expenses for water, sewer, electric, gas, and trash.

What to question

• Are utilities understated relative to property size and age
• Is tenant reimbursement realistically assumed

Reserves

Capital set aside for future repairs and replacements.

What to question

• Are reserves funded annually
• Are large capital items deferred beyond the hold period

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Net Operating Income (NOI)

Income after operating expenses and before debt service. NOI is a key driver of value and exit pricing.

Why it matters

NOI is what cap rates are applied to at exit, making it one of the most important numbers in the model.

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Financing and Cash Flow

Debt Service

Loan payments including principal and interest.

What to question

• Is the loan fixed or floating
• Are interest rate caps and extensions realistically modeled

Cash Flow to Investors

Income remaining after expenses and debt obligations.

What to question

• Are distributions dependent on refinancing
• How does cash flow perform under conservative assumptions

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Exit Assumptions

Exit Cap Rate

The capitalization rate used to estimate the future sale price.

Sponsors can materially inflate projected returns by assuming an aggressive exit cap rate. Even small changes here can have an outsized impact on IRR and equity multiples.

What to question

• Is the exit cap lower than the entry cap
• Does it assume stronger market conditions than today

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Why This Matters

Many deals look compelling because of optimistic projections rather than strong fundamentals. Understanding each line item and how it can be influenced helps investors evaluate opportunities with clarity and discipline.