Table of Contents
Net operating income
BLOGTOBER : October 6th
Net Operating Income – otherwise known as the NOI
NOI is used by real estate agents or investors to valuate commercial properties.
Why is NOI important?
- Creditors and commercial lenders use the net operating income to determine the income generation potential of the property to be mortgaged.
- The higher the NOI, the higher the property value.
- The higher the NOI, the higher the cash flow
How to calculate net operating income
NOI is calculated by subtracting all the expenses from the revenue from the property
For the visual learners,
NOI = RENTAL INCOME – EXPENSES
NOI is calculated before tax. It also excludes principal and interest payments on loans, capital expenditures, depreciation and amortization.
What are the operating expenses
Insurance
property management fees
legal fees
utilities
property taxes
repairs
janitorial fees.
Etc
What are the revenues
Rent
Late fees
Laundry income
Vending machines
Car wash
etc
You get the drift, anything that brings in income from the properties.
Where can I find this so-called NOI?
This can be found in the property income and cash flow statement. Some also list this on their site. We will be doing the calculations at the end. So stay with me.
One caveat is that on the listings, they sometimes lie about the expenses, so once the listing pass the sniff test, you need the actual statements from the seller.
From the calculation above, the net operating income can only be increased by increasing the rental income or decreasing the expenses. If you increase the rents on your property, or decrease your operating expenses, your NOI goes up.
Case study
So if you buy a property for 1 million dollars, the property has ten apartment units, each tenant pays $1,000 monthly. Let me save you the drama and say your expenses come up to $50,000
Rental income each for all unit in a month = $1,000 x 10 = $10,000
Rental income for the year = $10,000 x 12 = $120,000
NOI = $120,000 – $50,000 = $70,000
Where to find net operating income calculator ?
This same link below goes to a site that does an extended review of net operating income.
Net operating income calculator and further reading
Material for the visual learners
Short video that is worth your time . Exactly the time limit for my attention span.
https://youtu.be/NIqL6jBGdu8
For prior posts in Blogtober
Blogtober 1 – what is blogtober
Blogtober 2 – Commercial real estate infant
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Tomorrow’s term: Cash on cash return
I am a pulmonary and critical care doctor by day and personal finance blogger/debt slaying ninja by night.
After paying off close to $300,000 in student loan debt in less than 6 months into my real job, I started on a mission to help others achieve the same. There is no magic to this than to strap up and get it done. Some of the ways we achieved this include side hustle, budgeting, great negotiation skills, and geographical arbitrage.
When I was growing up, common knowledge in Nigeria is that there is one thing you cannot trust anyone else with, and you guessed it – your money.
Being frugal came easily to me based on my background. However, the concept of building wealth did not solidify in my mind until when I finished medical school. I wish I knew what I know now when I was 14. Still, I don’t know enough and I am constantly learning to improve my knowledge.
My goal is to reduce financial illiteracy among young professionals. I am catering to the beginners – babies and toddlers in financial literacy.
Today I Quit My Job says
Good summary of NOI. I was a land lord once i’m not sure if I want to do it again! Lots of work. My tenants would almost always call on a holiday or the day before with something they should have called about days before.
admin says
Landlording is a tedious job for most. That is one of the actual reason why I am going for commercial real estate. The property manager would take care of most business. For a handsome price of course. Thanks for stopping by. With your name, I keep thinking, when did you actually quit your job? Today, yesterday? hahaha
xrayvsn says
In commercial real estate, NOI is crucial in determining the value of the property. Essentially it’s your NOI divided by your cap rate that is the value given to a building. Anything that increases your NOI automatically increases your overall building value given a fixed cap rate.
admin says
That is true. More terms coming up. Most of my readings and the videos I watched emphasized raising the rent all the time. I always wonder, how high can you go with raising the rent.