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Why an APOD Is Popular With Real Estate Investment Plus Tips To Construct One!
An APOD (or Annual Property Operating Data) is essentially a real estate investment income and expense statement real estate investors and analysts routinely use as a guide to evaluate rental property performance.
In this article we’ll look at the APOD and consider what it may reveal about a property, how it’s constructed, its strengths and weaknesses, and when it is best used in a real estate analysis to measure the profitability of investment real estate.
Before we dig in, though, bear in mind that an APOD reflects "annual" property operating data, therefore the financial data contained in an APOD is annualized. So references to income, operating expenses, mortgage payment and cash flow always reflect an annual amount.
The popularity of an APOD is due to the fact that it gives an analyst a good first-glance at a property because it projects the income and expenses out just twelve months.
So it acts somewhat like a “snap shot” of the property’s financial performance. When you look at the statement you see a rental property’s income, operating expenses, mortgage payment (or debt service) and cash flow instantly.
Of course, all this financial data may or may not be the true story (but we’ll cover that later).
Pros and Cons
As stated, one of the essential advantages of an APOD is that it can tell you quickly and comprehensibly what amount of cash flow a rental property might generate after the first year of ownership. Fair enough.
On the other hand, however, this annual property operating data does not account for any elements of tax shelter such as tax allowances for property depreciation or deductions for mortgage interest payment.
So an APOD will not show you what cash flow or rates of return you might expect after you pay federal income taxes, or what your tax benefit or loss might be due to owning the property. It doesn't reveal issues related to taxes period.
Nor does the APOD account for the time value of money.
The twelve month cash flow projection is not discounted to arrive at a present value. It simply represents what a dollar is worth today without a regard to what it might be really worth in twelve months due to inflation. As a result, the APOD is unable to reflect rates of return associated with time value of money such as internal rate of return or net present value.
The APOD limits the annual property operating data to one page. To construct anything other than one page would defeat the benefit of being able to examine the rental property's financial performance during the first year of ownership quickly and easily.
Organize your data so it makes sense to the analyst. Remember, your objective is to show rental property income, less operating expenses, less mortgage payment, cash flow. So start at the top and work down.
Itemize for clarity but don't clutter. Operating expenses, for instance, should be itemized so an analyst can see what each of them are, but don't over do it. Provide as much detail as possible about the property's financial performance without making the APOD one over-bloated statement of facts and figures that becomes difficult to discern.
Include some rates of return, measures, and ratios. This is really the heart of the matter with real estate investors. They want to see how the investment measures up in terms of cap rate, gross rent multiplier, cash on cash return. And because these could ultimately determine whether or not an investor makes the real estate investment, include them.
How do you actually construct a hard copy of an APOD that you can print out? You have at least three options.
- Locate a blank copy of an APOD on the web and fill-in the blanks.
- Utilize a spreadsheet program like MS Excel and format your own.
- Purchase a real estate investment software program that creates it for you.
Okay, enough said about constructing an APOD, so let's move on to whether or not a real estate investor accepts it as a true indicator of rental property performance after a year of ownership.
Garbage in Garbage Out
Naturally, not unlike any other report created in a real estate analysis for the evaluation of a real estate investment, an APOD is only as good as the annual property operating data submitted.
When the real estate investment property's income, operating expenses or mortgages are skewed, than the real estate investment property's cash flows and rates of return are entirely skewed.
Therefore, you must always make sure by validating (double-validating) that the annual property operating data you are including in your APOD is correct and is (at the very least) reasonable to achieve.
When to present?
When is the best time to present an APOD to a potential real estate investor or rental property seller?
Always include it in your initial presentation of the property's real estate analysis.
As stated, it might not influence a buying decision (and shouldn’t), but if done correctly, this one-page income-and-expense statement can arouse a buyer to continue to evaluate at what price and on what terms a rental property will make sense as an investment. And that’s a good thing.
About the Author
James Kobzeff is a real estate professional and the owner/developer of ProAPOD - leading real estate investment software solutions since 2000. Create cash flow, rates of return, and profitability analysis on rental property at your fingertips in minutes! Learn more at www.proapod.com
ProAPOD also provides iCalculator - an online real estate calculator that enables you to learn dozens of real estate definitions and formulas as you calculate. You save 64%. Learn more at real estate calculator
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