Net Operating Income (NOI) is a calculation that can be used in commercial real estate to learn the profitability of income properties. It helps commercial investors understand a property’s performance, individually or in comparison to others. To determine the NOI, add all the revenue generated from the property and subtract the necessary operating expenses.
NOI is particularly valuable because it provides a standardized way to assess and compare various property investments. Remember that NOI is calculated before income taxes and does not include costs such as principal and interest payments on loans, capital expenditures, or deductions for depreciation and amortization. This allows investors to evaluate different real estate opportunities’ cash flow and overall viability.
Why is NOI Important for Investors?
Net Operating Income (NOI) is important in commercial real estate, it gives commercial investors insight into a property’s financial performance. To determine NOI, you total all the property’s revenue and subtract the necessary operating expenses.
For financed properties, NOI is also used for some property’s debt coverage ratios for lenders. Lenders want to make sure the property’s income covers its operating expenses and debt payments.
How to Calculate NOI
Net operating income (NOI) can also help commercial real estate investors evaluate a property’s performance and estimate its value. Here’s how it works.
NOI = Gross Operating Income – Operating Expenses
Gross Operating Income includes:
- Rental income
- Additional property-related income
Operating Expenses include (this is not a complete list):
- Property taxes
- Insurance
- Utilities
- Repairs and maintenance
- Property management fees
It’s crucial to remember that Net Operating Income (NOI) does not calculate mortgage principal and interest payments, capital expenditures, depreciation, or income taxes.
How Can Investors Use NOI for Calculations?
NOI can also calculate and evaluate an investor’s property performance. Such as:
- Use the numbers to compare the income of the existing investment to that of other properties.
- Can evaluate if the investment property earns enough to cover any debt.
- Can figure out the cap rate, which is the total rate of return on investment (ROI)
- Can calculate a property’s worth and evaluate how much to offer for the purchase.
What Does NOI Indicate?
Net Operating Income (NOI) is perfect for checking the profitability of an investment property. It helps compare different investment opportunities and helps investors make more informed decisions.
For real estate investors, understanding NOI is vital, but it’s also important for lenders. A positive NOI indicates that a property generates enough income to cover future mortgage payments. When the NOI falls short, creditors could be concerned about the borrower’s capacity to pay back their debt.
To find the NOI, take the commercial property’s total income and subtract all of its running costs. The asset is more profitable when it brings in more money and costs less to operate. Because of this, NOI is a very important way to figure out how profitable a real estate purchase is.
Factors Affecting NOI
When figuring out how much cash flow your business will have, you should look at its income and expenses. Some costs don’t change much over time, like management fees and costs for repairs and upkeep.
On the other hand, some things can change a lot, like rental income and energy costs. These changes are often caused by a number of things, such as interest rates, market conditions, demand, wage growth, unemployment rates, and the property’s age and condition.
Impact of Property Management Solutions on NOI
Property management solutions play a vital role in controlling a property’s Net Operating Income (NOI). These software tools help optimize operations and increase efficiency, which can greatly influence both revenue and expense management.
These systems streamline various tasks such as:
- Automate tasks like rent roll, rent collection, tenant billings (with the most current lease rates), and management of certificates of insurance (COIs).
- Provide straightforward analytics for property managers to monitor maintenance costs, utility bills, or other expenses.
- Enhance tenant satisfaction by providing direct communication, quicker response time, and maintenance requests.
- Analyze the prices based on market value and trends.
- Manage operating costs like utility usage or scheduling maintenance.
Limitations of Net Operating Income (NOI)
Net Operating Income (NOI) is a valuable metric for evaluating a property’s investment potential, but it does have its drawbacks. Since actual revenues and expenses can sometimes vary greatly from the estimates used in the calculation, the NOI you ultimately achieve at the end of a period may differ significantly from your initial projections.
Get in Touch with STRATAFOLIO
Net operating income is determined by taking the total revenue generated by the property and subtracting all associated operating expenses. To streamline your process, STRATAFOLIO is a commercial real estate software that can calculate NOI for an individual property or your entire portfolio. Schedule a demo today!
