Calculating NOI
What it means- Net Operating Income or NOI as it is commonly called is a property's income after being reduced by vacancy and credit loss and all operating expenses. It is a property's Gross Operating Income(GOI) less the sum of all operating expenses.
NOI represents a property's profitability before consideration of taxes, financing, or recovery of capital. It can be thought of as the number of dollars a property returns in a given year if the property is purchased for all cash and if there is no consideration of income taxes or depreciation.
NOI is one of the most important calculations you as a Real Estate professional will make in regards to commercial real estate investment and finance and one of the most important questions commercial mortgage brokers try to answer. It is one of the figures used in determining value in an income producing property and often over lookde by Realtors. In fact 40% of property listed does not contain the NOI within the listing or it is incorrectly calculated.
In order to calculate NOI correctly, you must realize what is and is not considered an operating expense. An operating is one that is necessary for the maintenance of a piece of of real property and ensures its continued ability to produce income. Loan payments, depreciation, and capital expenditures are not considered operating expense.
How to Calculate: NOI = GOI (-) Operating Expenses or Gross Scheduled Income (-) Vacancy and Credit Loss = Gross Operating Income, So then Gross Operating Income (-)Operating Expenses = NOI. Although that may seem a little daunting it is really quite simple if you use the CMSA/IRP, which is a stadardized for of documenting income, expenses,vacancy, credit loss, etc.. and allows easier computing of the NOI. Commercial Mortgage Group is one such company who uses this reporting format (Shameless Plug).
Lets look at an example: You have a client, Mr. Jones who wants to purchase a 25 unit apartment complex you have listed, after speaking with the client for several minutes about the ameneties of the property, the buyer asks:
Mr. Jones:what is the NOI of this property Mr/Ms.Realtor?
Mr./Ms. Realtor: NOI? uhh, hmmm, let me see.....NOI...NOI now where have I heard that before.
Luckily you have a great relationship with the broker from Commercial Mortgage Group(Shameless Plug) who has shown you how to calculate this all important figure for your clients. With your client on the phone you do some quick calculations using the information provided by the seller: Scheduled Gross Income=$200,000, Vacancy and Credit Loss=3% and Total Operating Expenses=$45,000. Ok, vacancy and credit loss= $200,000 X .03=$6,000. So now you can figure out the GOI(Gross Operating Income).
Gross Operating Income = (GSI - Vac. & Credit Loss)
(Gross Scheduled Income $200,000) - (Vacancy and Credit Loss $6,000) = GOI $194,000,now you can subtract your Operating Expenses of $45,000 to arrive at your NOI.
Net Operating Income = (GOI - Operating Expenses)
GOI:$194,000 - Operating Expenses: $45,000 = NOI of $149,000.
30 seconds later....
Mr./Ms Realtor: Mr. Jones based on what the seller has reported on their income and expenses for the most current year the NOI for this property is $149,000.
Mr.Jones:Thank you Mr. Realtor, most of the Realtors I have worked with could care less about the NOI for a property and I have never met one who would take the time to figure it out for me.
You have just earned the respect of this buyer and shown that you know something about commercial property other than how to list it! Most buyers will skip over listings that do not contain the NOI. If you need help ask a reputable Commercial Mortgage Broker for assistance.
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