This past Tuesday, we learned about the term Net Operating Income (NOI). The NOI is one of the most important formulas you should know, because it’s also used in so to determine the potential profit of an investment after all expenses have been made. It is also used in many other calculations (such as cap rate, debt coverage ratio, etc.)
In this week’s Thursday Tip, I will break down an example of the NOI formula:
NOI = Operating Income – Operating Expenses
Net Operating Income Example: We will use one of my rental properties to demonstrate the NOI formula. This property rents for $1,215 per month and we assume a 5% vacancy loss ($60). The property also has the following expenses:
- Repairs/maintenance – $75
- Property management (6%) – $ 73
- Property taxes – $69
- Insurance – $100
- HOA Dues – $210
- Total expenses – $ 527
So, the operating income is $ 1,215 and the operating expenses are $587 (Total expenses + vacancy loss). This leaves an NOI of $628 per month, or $ 7,536 per year. Remember, this doesn’t account for your debt payments, but if you own the property free and clear, this is the amount that would go into your pocket.
This is one of the most important calculations, lender finds this number extremely interesting. It is the amount of money you will have to pay them! So, your loan amount is based upon this number.
As always, feel free to message me with any questions or if you would like to discuss this further. Wishing you great success in all you do!