Net Operating Income (NOI)
Each property is different. Maintenance expenses, rent rolls, vacancy expectations, and countless other variables come into play.
As an investor, it’s helpful to have some guidelines that you can use to quickly analyze a property.
The first thing you need to know is how much money a property actually makes. For that, many investors work to figure out the Net Operating Income (NOI).
To calculate net operating income, take the total amount that the building brings in for rent (and other sources of income) and subtract how much it takes to run the building (operating expenses).
You don’t include any expenses related to financing for this calculation. You’re really thinking of this as an all cash, non-leveraged asset. If you owned this thing outright, what would your return be? We’ll factor in financing later on.
Example:
You have a duplex with each unit paying $1000 monthly in rent. Your gross revenue is $1000 x 2 x 12 for the year, or $24,000. But let’s nuance that just a bit for vacancy. Let’s factor in 5% vacancy. So, now your $24,000 becomes $22,800.
Now, let’s subtract for taxes, insurance, utilities, maintenance, advertising, property management (unless you’re going to self-manage), and other expenses. For this example, you’re going to self-manage. Let’s say those all add up to $13,500.
That makes your net operating income $9300. So...do you want to buy this building with those assumptions? That’s up to you, although at Green Light Real Estate we can certainly advise you on that decision.
Next article: Cap Rate and Multi-Family Real Estate