Variable Cost

A variable cost moves with activity. On a rental, management fees charged as a share of rent are the clearest case, and maintenance and turnover costs tend to rise with occupancy and tenant changes. In a cap rate model they are often entered as percentages of effective gross income.

The example property carries three percentage lines: 8% management, 5% maintenance and 5% capital reserves, 18% of effective gross income in total. On $45,600 that is $8,208 a year. If collected rent fell by 10%, these lines would fall with it while taxes and insurance stayed put.

Percentage expenses also explain why rent increases do not flow to NOI in full. Each $100 of monthly rent adds $1,200 a year, but after 5% vacancy and 18% of variable costs only about $935 reaches NOI. That is the figure to capitalize when you estimate what a rent increase is worth.