The Net Operating Income(NOI) is a calculation of the properties operating value minus the expenses the property generates.There are many ways that the NOI can be calculated, but one of the easiest ways is to total all the income a property generates and subtracting all of the expenses the property accrues. Anticipating the NOI is a good way to consider the risks of investing in properties, but would not be a surefire way to get a complete total of income. This number would be an estimate due to unforeseen expenditures, taxes, and fluctuating operating costs. While the exact amount may not be known in advance, a broad total would help with assessing the level of risk a potential investor would like to measure.

Since NOI is calculated annually, an investor can simply multiply operating costs by 12 to get an idea of potential expenditures and weigh that figure against income in that same year. This information would give an investor a head start in planning for a more secure property investment. This same investor would also be able to avoid investing in upside-down properties, also known as ones with Net operating loss (NOL).

A benefit to estimating the NOI is being able to set the valuation of a property. This Cap Rate would make sure that the property is at fair market value. There may be confusion as to what is considered an operating cost for the property. Simply, it would be the daily expenses of operating the property. This wouldn’t include investments like securing a mortgage or property taxes. Those figures would have to be considered outside of the daily expenditures.

Aside from investors, lenders may utilize this calculation to determine if the property is a good investment deal to broker a loan. Since NOI is dependent on variables such as rent, utilities, etc, it should be used as an addition to determining value of an investment, and not the only tool used to gather investment information. NOI is an appropriate way to gauge the value of a potential investment.

Key Points:

  • 1NOI is a tool used to determine if a property will make a good investment.
  • 2NOI determines cash flows and profits from a real estate investment.
  • 3There is one variability on NOI, and that is how the property will be operated and ran.

By using NOI to evaluate a deal, real estate investors can get a better look at the potential profitability of a property in relation to how much it would cost to operate it. NOI is typically calculated on an annual basis; although, investors can easily adapt the operating costs by dividing expenses by twelve.