NOI = Gross Revenue – Total Operating Expenses
The NOI, or Net Operating Income, is one metric used to evaluate an income-producing asset. It is defined as the total income that a property generates less than the total operating expenses and losses from vacant units.
Prior to investing too much time, energy, and money into acquiring a property, it is crucial for investors to have a clear understanding of the amount of revenue an asset can generate. Many people confuse NOI with the amount of money the property is generating before they take expenses into consideration. When looking at financials on a property and all expenses are not being deducted, the numbers become falsely inflated and are essentially meaningless. How much does it actually cost to operate the property? How much would it cost if a tenant left? How about if two or more tenants left? Does the property generate enough income to sustain the investment? While looking at total revenue is important, knowing the percentage of expenses you can expect to incur is equally, if not more important.
The financial health of the property and the ability to generate income is paramount to the overall financial success of the investor. The NOI is a key factor in determining if the property makes sense from a financial standpoint.
Let’s use NOI in an example:
Let’s say you own a multi-family property that earns $75,000 a year. It also earns $ 5,000 in other income from laundry, storage, and parking.
The investment property’s vacancy losses are calculated at 10% and the vacancy rates combined with the other operating expenses give a total of $35,000. What is the property’s NOI?
Gross Rental Income = $75,000 + $5,000 in other income = $80,000
NOI = $80,000 – ($35,000 vacancy losses + operating expenses) = $80,000 – $35,000 = $45,000
This leaves a balance of $45,000 for a profit on the building. Having a clear understanding of all of the various numbers involved with an investment property is going to be key to building your financial wealth in the real estate market.
KIM CASEY Real Estate Advisor
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