What is Net Operating Income (NOI): How to Calculate + NOI Formula.

 

“You miss 100 percent of the shots you never take, and if you think it’s expensive to hire a professional to do the job, wait until you hire an amateur “    I AM YOUR LAND / INDUSTRIAL AND INVESTMENT SPECIALIST / LOOKING FOR OWNERS  Call me if you want to sell your property and  need an estimated value.  Direct : 602-759-1209, Prefer cell: 520-975-5207 or email me walterunger@ccim.net.    A  CLICK HERE TO VIEW ALL MY $ 60 MIL OF LISTINGS .  

 Net Operating Income (NOI) evaluates a real estate investment’s ability to produce operating income from its operations. It measures the amount of cash flow generated by an investment property after operating expenses have been paid. NOI analysis is typically used by real estate investors determine the value and profitability of a commercial property.

Net Operating Income Formula

It is relatively simple to calculate the net operating income (NOI) of a property. We will show you the formula and then discuss each of the components below.

The net operating income (NOI) formula is:

NOI = (Potential Rental Income) – (Vacancy and Credit Losses) + (Other Income) – (Total Operating Expenses)

Potential Rental Income

Potential rental income (PRI) is the combined total rent under the terms of each individual commercial lease, with the assumption that the property is 100% occupied. If the property is not fully occupied, then the amount of PRI is based on market analysis, according to the leases and terms of comparable properties.

Vacancy and Credit Losses

Vacancy and credit losses represent the lost of income due to tenants vacating the property and/or tenants defaulting on their lease payments. The vacancy factor can be calculated based on current lease expirations. Market-driven figures using comparable property vacancies can also be used for the purpose of calculating a property’s NOI.

Other Income

Because there are many different ways a property can generate income, real estate investors need to include all possible revenues in their calculation, in addition to monthly rent. These other revenues include, but are not limited to, facility rental proceeds, proceeds from vending machines, proceeds from laundry services, income generated from parking fees, billboard/signage fees, and other relevant service charges.

Total Operating Expenses

Total operating expenses include all necessary expenditures associated with revenue-generating activities. These expenses are usually required to maintain the property and run a commercial real estate business. Operating expenses can include property management fees, marketing and advertising, utilities, property taxes, repairs and maintenance, insurance, and janitorial expenses.

Expenses Not Included In NOI

It is important to note that debt service, depreciation, capital expenditures, leasing commissions, tenant improvements, income taxes, and mortgage interest expenses are not included in the calculation of net operating income. This is because NOI is unique to the property itself and does not include other expenses that are specific to the owner/investor.

Why is Net Operating Income Important?

Net operating income (NOI) is important because it helps real estate investors evaluate whether a potential rental property is worth investing in. Before a purchase, an investor can use NOI to assess a property’s value, helping them to make an investment decision. After the purchase, NOI can be used as a measure of operating cash flows.

In some cases, lenders who finance an investment property are also interested in knowing the net operating income of the property. This is because NOI is sometimes used as one of the deciding factors in approving a loan for real estate investors.

Pros and Cons of Using Net Operating Income

The calculation of a property’s net operating income is an important way to determine its value as well as evaluate its profitability. Still, the use of NOI in making decisions about a real estate investment has both its advantages and its downsides. Let’s take a look at the potential pros and cons of NOI below.

Pros of Using NOI

  • NOI determines an investment property’s initial value, helping real estate investors identify whether it will make a good investment.
  • The use of NOI provides an overview of a property’s ongoing operating revenue.
  • NOI also helps lenders and creditors determine whether a property generates sufficient cash flow to cover any potential debt service.

Cons of Using NOI

  • NOI analysis can be manipulated since a property owner can choose to accelerate or defer certain expenses.
  • The NOI of a property is not always constant – it can change depending on how the property is managed.
  • Because other expenses are not considered in NOI (e.g. interest expense, debt service, income taxes, capital expenditures), the actual cash flow that a property can generate may differ after all these other expenses are paid.

How to Improve Net Operating Income

A property with high net operating income is typically a good thing. A positive NOI means a property’s operating revenues are higher than its operating expenses. A negative NOI indicates that the operating expenses of a rental property exceeds its revenues. To help, there are different methods to improve the NOI of a real estate investment.

Here are 3 ways to improve an investment property’s NOI:

  1. Improve Rental Income

The main source of revenue from an investment property is its rental income. One way to improve your rental income is to make sure that you have a high occupancy rate at 90% or above. Another method is to review your rental rates to make sure that the rent is properly priced according to its comps and its target tenant demographic.

  1. Find Additional Income Sources

Review other possible sources of revenue that your property can generate. For example, does it have laundry and vending services? Do you charge parking fees for tenants and/or guests? Do you offer other premium services? Perhaps there are other ways to make the property generate more revenues in addition to what it already does.

  1. Minimize Operating Expenses

A property’s operating expenses have a big impact on its net operating income. Therefore it is a good idea to cut or trim operating costs when you can. For instance, you can reduce costs on utilities by ensuring that unused lights are turned off. Or maybe you can pass through janitorial expenses to the tenants as maintenance fees instead of absorbing it as an amenity.

Bottom Line

Net operating income is essential in evaluating and valuing an investment property. This helps investors and creditors decide whether the property is worth investing. Although NOI has its drawbacks, it gives good insight into a property’s ability to generate cash flow as well as its overall value.

FROM ME:                                                                      

Phoenix Commercial Real Estate and Investment Real Estate: Investors and Owner / Users need to really know the market today before making a move in owner user Commercial Properties, Investment Properties and land in Phoenix / Maricopa County, Pinal County / Arizona, Properties and Investment Properties. I am marketing my listings on Costar, Loop-net CCIM, Kasten Long Commercial Group.  I also sold  hundreds millions of dollars’ worth of  Investment Properties / Owner User Properties in Retail, Office Industrial, Multi-family and Land in Arizona and therefore I am working with  brokers, Investors and Developers. I am also a CCIM and through this origination ( www.ccim.com ) I have access to marketing not only in the United States, but also international as the market has a lot of moving parts today. What is going on socio-economically, what is going on demographically, what is going on with location, with competing businesses, with public policy in general — all of these things affect the quality of selling or purchasing your Commercial Properties, Commercial Investment Properties and Commercial and large tracts of Residential Land  Therefore, you need a broker, a CCIM (Certified Commercial Investment Member) who is a recognized expert in the commercial and investment real estate industry and who understands Commercial en.wikipedia.org/wiki/CCIM    I AM YOUR LAND / INDUSTRIAL AND INVESTMENT SPECIALIST / LOOKING FOR OWNERS   CLICK HERE TO VIEW ALL MY $ 60 MIL OF LISTINGS     PLEASE CALL ME –  Direct : 602-759-1209 , cell: 520-975-5207 or email me walterunger@ccim.net

Commercial Real Estate News That Matters – GREATER PHOENIX APARTMENT OWNER’S NEWSLETTER 2nd QTR 2019 –  Kasten Long Commercial Group –

 

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CLICK HERE FOR APARTMENTS FOR SALE:

Commercial Real Estate News That Matters – GREATER PHOENIX APARTMENT OWNER’S NEWSLETTER 2nd QTR 2019 –  Kasten Long Commercial Group –

 

 

 

Walter Unger CCIM

Senior Associate Broker

Kasten Long Commercial Group

5110 N 40th Street, Suite 110

Phoenix , AZ 85018

CELL: 520-975-5207

Direct: 602-759-1209

Office: 602-445-4112

Fax:       602-865-7461

walterunger@ccim.net

CLICK HERE TO VIEW ALL MY LISTINGS

www.Walter-Unger.com

www.KLCommercialGroup.com

What is a CCIM.

 

 

 “You miss 100 percent of the shots you never take, and if you think it’s expensive to hire a professional to do the job, wait until you hire an amateur “  ARE YOU READY TO SELL OR PURCHASE YOUR INDUSTRIAL / OFFICE OR RETAIL BUILDING OR YOUR  LAND  in Phoenix, Maricopa County and Pinal County, Arizona, please call me.  Office: 602-445-4113,  Direct : 602-759-1209 , cell: 520-975-5207 or email me walterunger@ccim.net.  … CLICK HERE TO VIEW ALL MY LISTINGS.

 Let me know if you are interested in Apartments: CLICK HERE FOR APARTMENTS FOR SALE     

CLICK HERE:  Arizona Opportunity Zones As We Understand /maps. Interested!!! Please contact me.

History of Arizona from  900 BC – 2017 -Timeline.

WHY PHOENIX? AMAZING!!!  POPULATION – IN 1950 THERE WERE 331,700 PEOPLE LIVING IN PHOENIX – “NOW 5 MIL”. – “5TH. BIGGEST CITY IN USA”

PHOENIX TOPS US IN POPULATION GROWTH (MORE THAN LA, NYC) AND WHY THAT’S GOOD FOR THE ECONOMY, BUSINESS

 

8 Reasons You Should Invest in Land

History of Arizona from  900 BC – 2017 -Timeline.

 

WHY PHOENIX? AMAZING!!!  POPULATION IN 1950 – 350 K PEOPLE; “NOW 5 MIL”. – “5TH. BIGGEST CITY IN USA”

PHOENIX TOPS US IN POPULATION GROWTH (MORE THAN LA, NYC) AND WHY THAT’S GOOD FOR THE ECONOMY, BUSINESS

DOT – LOOP 202 / SOUTH MOUNTAIN FREEWAY / PHOENIX AZ – UNDER CONSTRUCTION

ARIZONA FACTS – YEAR 1848 TO 2013

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What is a CCIM.

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  • DEMOGRAPHIC FACTS ABOUT MARICOPA COUNTY:
  • The average age of the population is 34 years old.
  • The health cost index score in this area is 102.1. (100 = national average)
  • Here are some of the distributions of commute times for the area: <15 min (22.7%), 15-29 min (36.8%), 30-44 min (25.1%), 45-59 min (8.6%), >60 min (6.8%).

PHOENIX PROJECTED AS NUMBER ONE US HOUSING MARKET FOR 2017

LIST OF ECONOMIC DEVELOPMENT PROJECTS IN PINAL COUNTY, REVISED 2-14-17

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2016 Official Arizona Visitors Guide

Visit Arizona

Why Phoenix?  This is a very interesting article, you should read it, amazing, there were only 350 K people living in Phoenix in 1950

Timeline of Phoenix, Arizona history

Phoenix, Arizona

Facts of Arizona – year 1848 to 2013

Feel free to contact Walter regarding any of these stories, the current market, distressed commercial real estate opportunities and needs, your property or your Investment Needs for Comercial Properties in Phoenix, Tucson, Arizona.

Walter Unger CCIM

Senior Associate Broker

Kasten Long Commercial Group

5110 N 40th Street, Suite 110

Phoenix , AZ 85018

Direct: 602-759-1209

CELL: 520-975-5207

Office: 602-445-4112

Fax:       602-865-7461

walterunger@ccim.net

CLICK HERE TO VIEW ALL MY LISTINGS

www.Walter-Unger.com

www.KLCommercialGroup.com

What is a CCIM.

 

“You miss 100 percent of the shots you never take, and if you think it’s expensive to hire a professional to do the job, wait until you hire an amateur “   

Please check maps if your Land or Commercial Property is in the Opportunity Zone, IF SO CONTACT ME / THIS IS FOR SELLER’S AND BUYER’S.

ARE YOU READY TO SELL OR PURCHASE YOUR INDUSTRIAL / OFFICE OR RETAIL BUILDING OR YOUR  LAND  in Phoenix, Maricopa County and Pinal County, Arizona, please call me.

Also Call me if you need an estimated value of your Property.

Call me if you want to see a map with what is in the Construction Pipeline for Apartments.

Direct : 602-759-1209,  Prefer cell: 520-975-5207,   or email me walterunger@ccim.net.       CLICK HERE TO VIEW ALL MY LISTINGS.    

 

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 Walter Unger CCIM, CCSS, CCLS

I am a successful Commercial / Investment Real Estate Broker in Arizona now for 20 years.  If you have any questions about Commercial / Investment Properties in Phoenix or Commercial /  Investment Properties in Arizona,  I will gladly sit down with you and share my expertise and my professional opinion with you. I am also in this to make money therefore it will be a win-win situation for all of us. 

Please reply by e-mail walterunger@ccim.net or call me on my cell 520-975-5207

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