Net operating incomeNOI
A property's annual income after vacancy and operating expenses but before debt payments and income taxes; the number most other real estate math starts from.
Glossary
Value-add
An investment strategy of buying an existing building, improving it through renovation or better management, and raising its income and value; distinct from new construction.
A value-add investment buys a building that is underperforming and fixes what is holding it back. The fix might be physical, such as renovating kitchens and bathrooms, replacing systems, or adding amenities, or operational, such as reducing vacancy, cutting expenses, or raising rents that had drifted below the market. The investor's return comes from the increase in net operating income and the higher value that income supports at sale.
The arithmetic mirrors development on a smaller scale. Assume a renovation costs $20,000 per unit and allows rent to rise by $250 per month: that is $3,000 a year of added income on $20,000 of cost, a yield on the improvement of 15% before vacancy. If the market cap rate is 6.0%, each $3,000 of added NOI adds $50,000 of value, so the investor has created $30,000 of value per unit for $20,000 of cost. Whether the rent increase actually materializes is the risk.
Value-add strategies are relevant to housing affordability because they are a common path by which older, lower-rent buildings become higher-rent buildings. The renovated units are better, and they cost more. Whether that is a loss of affordable housing or an improvement in housing quality depends on what would otherwise have happened to the building and on whether new supply is being added elsewhere. It is a trade-off we describe rather than resolve.