What you're actually buying.

When you buy an apartment building, you are buying a stream of income — and the market prices that stream the way it prices any income: as a multiple. The bricks matter, the roof matters, the location matters, but they matter because of what they do to the income and to the risk around it. Two buildings on the same street with the same paint can carry very different prices, honestly, because one collects more rent and spends less to operate.

The income being priced is net operating income — NOI. It is what the building earns in a year after the real costs of running it: taxes, insurance, utilities the landlord pays, maintenance, the superintendent, snow, waste, administration. It is measured before mortgage payments, because the mortgage belongs to the owner, not the building. Two buyers with two different lenders will finance the same building two different ways; the building's earning power does not change when the financing does.

The multiple has a conventional name: the capitalization rate, the ratio of NOI to price. A building earning $100,000 that trades at $2,000,000 traded at a five per cent cap rate. Flip the arithmetic and the same fact reads as a multiple of twenty times income. The two statements are identical; cap rates are simply the industry's habit.

What is worth being precise about is what a cap rate is not. It is not a return you are promised, and it is not a dial anyone controls. A cap rate is an output — the record of what buyers and sellers actually agreed to, in a particular market, for a particular kind of building, at a particular moment. Smaller markets tend to trade at higher cap rates than the core of a big city; older buildings tend to trade higher than new ones; a building with problems trades higher than one without. Higher cap rate means lower price per dollar of income, which is another way of saying the market demanded more compensation for the risk it saw.

This is also why the same building can carry two honest prices. Priced on the rents it collects today, a building with long tenancies and old rents earns one NOI. Priced on what the market suggests those units could rent for, it earns another. Neither number is a lie — they answer different questions, and a careful buyer runs both. The gap between them is its own subject, and it has its own page in this library.

The practical consequence of income pricing is the lever it hands an owner. If value is income times a multiple, then every dollar added to NOI — a utility moved to the tenant who uses it, a vacant unit turned and re-rented, an expense that stops being wasted — is multiplied by whatever the market's multiple happens to be. At a five per cent cap rate, a dollar of NOI is twenty dollars of value. That arithmetic is the engine behind most of what the rest of this library describes, which is why the pages here spend as much time on what the levers cost as on what they add.

Try the arithmetic yourself below. Enter any two of the three numbers and the third follows — there is no judgment in it, only division.