Net Operating Income
By Preston Ames
Why use NOI in real estate?
Net operating income (NOI) tells an investor what they should pay or sell the property for given the income and expenses. It is basically an evaluation calculation based on the performance of a given real estate property. It is important to know what the cap rate is because this metric has a large impact with the calculation of NOI.
NOI is useful to see the revenue a property can generate. Also the total value of the property based on income and expenses.
Income from property – operating expenses = net operating income
It is important to note that markets change and so does NOI. The given rents can change and the expenses year to year can change. It is important to know that this is a considered a con when using NOI as a tool to evaluate a property.
Here is an Example
Let’s say that an investor owns a property with two hundred units. We know that the average rent is $500 per month. This goes into our income for the property. We also know that parking and laundry generate $50,000 a year in income. We are given that 30% percent of expenses are operating expenses and the vacancy expense is 6%. Our cap rate is 9%. We can use these facts to calculate the NOI of the property.
200 units* $500 average rent *12 = 1,200,000
Laundry and parking income = $50,000
Gross income = 1,250,000
Vacancy expense = 6%.
Operating expenses = 30%.
Expenses = $450,000
Cap rate = 9%
800000/.9 = NOI
Value of property.
$8,888,888.88
What properties can use NOI?
The properties use NOI are rental properties, commercial, and homes that are used as rental.
What expenses count towards NOI?
Property management fees, General maintenance, Legal fees, Property taxes, Insurance costs.
What expenses don’t count as expenses?
Mortgage interest, Income taxes, Leasing commissions, debt service, property depreciation, Tenant improvements, capital expenditures, Small wear and tear.
It is important to note that there are many metrics to use when evaluating the value of property. This metric is used by investors but be sure to make sure you know what this metric tells you. Investors would be wise to know all the metrics used to evaluate the metrics of a property and compare them to the NOI performance.
Preston Ames has an MBA from Cal Lutheran. He has worked as an auctioneer for 6 years and worked as a marketing agent under a real estate broker. He has a certificate in Financial Planning from UCLA and also graduated from the Yale school of management CIMA certification program. His main areas of expertise are marketing, Finance, and Business.