Hotel and Apartment Building Investments: Key Metrics Every Investor Should Know
NOI, cap rate, DSCR, occupancy, ADR, RevPAR and GRM explained, with worked examples of how appraisers and lenders value hotels and apartment buildings.
Updated & fact-checked Figures are linked to their sources at the end of the article.
A hotel and an apartment building are both worth what their income will support. Buyers, sellers, lenders and appraisers all talk about that income in the same handful of numbers: net operating income, cap rate, debt service coverage and, for hotels, occupancy, average daily rate and RevPAR. If you know how each is built, you can check a broker’s package, see why a lender offers less than you hoped, and understand an appraisal.
This guide is for owners and buyers of apartment buildings and hotels. It defines each metric, shows how valuation uses them, and works through two labelled examples. The examples use round, made-up figures to show the arithmetic; they are not market data.
Net operating income: the number everything else uses
Net operating income (NOI) is the property’s income after operating expenses, before mortgage payments, income tax and depreciation. It is built in steps:
From rent roll to NOI
Potential gross income
Rent (or room revenue) if every unit were let at current rates for the whole year.
Less vacancy and credit loss
An allowance for empty units and unpaid rent, based on the building’s history and the local market.
Plus other income
Parking, laundry, storage, and for hotels, food and beverage, meeting rooms and fees.
Equals effective gross income
What the property can realistically collect.
Less operating expenses
Property tax, insurance, utilities paid by the owner, repairs and maintenance, management and payroll, and for hotels, brand, management and reservation fees and a reserve for replacing furniture and equipment.
Equals net operating income
Mortgage payments and capital spending on major projects are not deducted at this stage.
The most common mistake in a sale package is an NOI that leaves out real costs: no management fee because the owner manages the building, a vacancy allowance of zero, or a property tax figure that will rise after the sale is reassessed. Buyers and appraisers will add those back, so sellers should too.
Cap rate, value and the gross rent multiplier
The capitalization rate (cap rate) is the ratio between a property’s NOI and its price. BC Assessment, which values apartment buildings, hotels and other income property for property tax, describes it as the potential rate of return expected on a real estate investment, and shows how dividing a property’s NOI by a market cap rate gives an estimate of market value.[1]
- Value = NOI ÷ cap rate. A lower cap rate means a higher price for the same income.
- Cap rate = NOI ÷ price. Used to compare sales: the cap rates of recent sales of similar buildings set the rate for the one being valued.
Cap rates are a market observation, not a target. They move with interest rates, with the risk of the property type and with the quality and location of the building, so a rate is only meaningful when it comes from comparable recent sales.
The gross rent multiplier (GRM) is price divided by gross annual rent. It is quick to calculate from a listing, but it ignores expenses: two buildings with the same rent and very different tax, heating or repair bills have the same GRM. Treat it as a screening tool for apartment buildings, never as a valuation.
Debt service coverage: what the lender looks at
The debt service coverage ratio (DSCR, called DCR by CMHC) is NOI divided by the annual mortgage payments. A ratio of 1.20 means the property earns 20% more than it needs to pay the mortgage. Lenders size loans so the ratio stays above their minimum, which is why a building’s NOI, rather than the price you agreed, often decides how much you can borrow.
In Canada, CMHC’s mortgage insurance for standard rental housing sets these minimums:[2]
| Property | Minimum DCR |
|---|---|
| Residential space, 5 or 6 units | 1.10 for a purchase; 1.20 for a refinance |
| Residential space, 7 or more units | 1.20 for a term of 10 years or more; 1.30 for a term under 10 years |
| Non-residential space, 5 or more units | 1.40 for a term of 10 years or more; 1.50 for a term under 10 years |
The same program requires at least five rental units, a building that is at least 70% residential by floor area and loan value, and a maximum loan-to-value ratio of 85%.[3] Conventional lenders and U.S. agency lenders set their own minimums, and hotels, with their more volatile income, are usually underwritten more conservatively than apartments.
Example: valuing an apartment building
| Line | Amount | How it is calculated |
|---|---|---|
| Potential gross rent | $768,000 | 40 units × $1,600 a month × 12 |
| Less vacancy and credit loss | −$30,720 | 4% allowance |
| Plus other income | +$12,000 | Laundry and parking |
| Effective gross income | $749,280 | |
| Less operating expenses | −$300,000 | Tax, insurance, utilities, repairs, management |
| Net operating income | $449,280 | |
| Value at a 5.5% cap rate | ≈ $8.17 million | $449,280 ÷ 0.055 |
| Gross rent multiplier at that price | ≈ 10.6 | $8.17 million ÷ $768,000 |
| Annual payments on a $6 million loan | ≈ $347,000 | 5% interest, 40-year amortization, monthly payments |
| Debt service coverage | ≈ 1.29 | $449,280 ÷ $347,000 |
Two things stand out. First, the cap rate is powerful: the same $449,280 of NOI is worth about $8.99 million at a 5.0% cap rate and about $7.49 million at 6.0%. A half-point change moves the value by roughly three-quarters of a million dollars. Second, every dollar of extra NOI is worth about $18 of value at a 5.5% cap rate, which is why owners focus on expenses as much as rent.
Hotel metrics: occupancy, ADR and RevPAR
A hotel sells rooms by the night, so its income is measured differently:
- Occupancy is rooms sold divided by rooms available.
- Average daily rate (ADR) is room revenue divided by rooms sold.
- Revenue per available room (RevPAR) is room revenue divided by rooms available. It equals occupancy × ADR, so it captures both whether rooms are full and what they sell for.
Real national figures show how the three fit together. CoStar, which publishes the STR hotel benchmark data, reported these results for 2025:
| Country | Occupancy | ADR | RevPAR |
|---|---|---|---|
| United States | 62.3% (−1.2%) | US$160.54 (+0.9%) | US$100.02 (−0.3%) |
| Canada | 66.1% (+0.7%) | C$216.10 (+3.5%) | C$142.89 (+4.2%) |
U.S. figures are from CoStar’s release of January 20, 2026, which noted that occupancy and RevPAR fell for the first time since 2020.[4] Canadian figures are from CoStar’s release of January 21, 2026, which called 2025 the highest annual top-line performance on record for Canadian hotels.[5] Compare a hotel’s RevPAR with its local competitors, not with national averages: STR-style benchmark reports compare a property with a chosen set of nearby hotels.
Example: valuing a hotel
Example. A 100-room hotel has 36,500 room nights available a year. At 66% occupancy it sells 24,090, and at an ADR of $180 it earns about $4.34 million of room revenue, a RevPAR of $118.80. Suppose that after all departmental costs, overheads, management and brand fees and a reserve for furniture and equipment, the hotel’s NOI is $1.3 million. At an 8% cap rate it would be worth about $16.25 million, or $162,500 per room (“per key”). The figures are invented to show the arithmetic.
Hotels differ from apartments in three ways that affect valuation:
- The income is a business. A hotel’s NOI depends on management, brand and marketing as much as on the building, and it can change month to month. Buyers and lenders look at several years of operating statements, not one.
- The sale includes more than real estate. Furniture, fixtures and equipment, and the operating business, are usually sold with the building, and an appraiser may need to separate them.
- Brand and management contracts travel with the deal. A franchise agreement can require renovations on sale, and a long management contract can limit a buyer’s options. Read both before relying on any value.
How appraisers put it together
Appraisers use three approaches to value: direct comparison (recent sales of similar properties), cost (the cost to rebuild less depreciation, plus land) and income (capitalizing or discounting the property’s income). BC Assessment notes that the approach applied depends on how a property trades in the market.[1] Apartment buildings and hotels trade mainly on income, so the income approach normally carries the most weight, with comparable sales used to support the cap rate and price per unit or per key.
Sources
- Assessing Industrial, Commercial and Investment (ICI) Properties — BC Assessment. Checked 2026-10-12.
- CMHC Standard Rental Housing (fact sheet) — Canada Mortgage and Housing Corporation, 2025. Checked 2026-10-12.
- Mortgage Loan Insurance for Standard Rental Housing — Canada Mortgage and Housing Corporation. Checked 2026-10-12.
- U.S. hotels report first full-year occupancy, RevPAR declines since 2020 — CoStar, January 20, 2026. Checked 2026-10-12.
- Canada hotels post record-setting performance in 2025 (CoStar release, republished) — Hotel Online, January 21, 2026. Checked 2026-10-12.
