The Net Operating Income (NOI) calculation is one of the most important formulas you should know, because it’s also used 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 article, we will break down an example of the NOI formula. To calculate the NOI, you take the Operating Income and subtract the Operating Expenses.
NOI = Operating Income – Operating Expenses
Net Operating Income Example: We have a property that rents for $1,215 per month and we assume a 5% vacancy loss ($60). The property also has the following budgeted monthly expenses:
Repairs/maintenance – $75
Property management (6%) – $ 73
Property taxes – $69
Insurance – $100
HOA Dues – $210
Total expenses – $ 527
In this example, the property’s operating income totals $ 1,215 and the property’s operating expenses total $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 in determining if a property is a good investment. The lender will also find this number extremely interesting as this NOI formula contributes to how much money you will have to pay them! So, your loan amount is based upon this number.
Intro to Real Estate
At Intro to Real Estate, we are investors that personally know the freedom and potential that comes with real estate investing and we want to share this knowledge with you in our real estate education courses. If you are ready to invest in your future, start by investing in your education. Click here to contact us today.
Wishing you great success in all you do!