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What is Net Operating Income or NOI (and Why Does it Matter)?

by Dena Landon, posted in Stessa News

Net operating income or NOI tells real estate investors how much money you make from a given investment property on a weekly, monthly, or yearly basis. It’s an investor’s version of a high-level income statement.

Many investors claim this is the MOST important metric in your investing business, but here are our top ten metrics via blog post or YouTube video, in order, in case you’re interested. NOI is important, as it has a direct impact on your cash flow for single-family and condo investors, and will even dictate the value of your property when you get into multifamily and commercial real estate. 

The good news is that it’s super easy to figure out. To calculate it, take your total income and subtract operating expenses.

TOTAL INCOME — TOTAL OPERATING EXPENSES = NET OPERATING INCOME (NOI)

Never include your mortgage payments or taxes in the NOI calculation, those are not considered operating expenses. So all of your yearly operating expenses, such as insurance, property management, utilities bills, etc. These are the recurring expenses, not large capital expenditures such as a roof repair or appliance replacement.

Don’t forget to include income from laundry machines, extra fees for parking or storage, or any service fees in your total income (all income, not just rents). 

The calculation excludes capital expenditures, taxes, mortgage payments, or interest. Investors use NOI solely to judge a building’s ability to generate revenue and profit. It tells you if a specific investment will generate enough income to cover mortgage payments.

When using NOI to evaluate a potential investment, remember that projected rents could prove inaccurate. And, if the building is improperly managed or there’s market volatility, income could be inconsistent.

Chief Market Analyst, Patrick Carlisle, of Compass Real Estate, offers some sounds advice for real estate investors with rental properties that are trying to keep their operating expenses down:

“Most expenses are relatively fixed, and smart landlords already manage them firmly. Of course, if your older building still has central heat, changing it to separately metered heat is almost always a worthwhile investment.”

And now for a case study. Let’s look at an actual investment property owned by a Stessa investor to calculate its NOI (and discuss why it matters):

Chris owns a single-family home in Kansas that he rents out. For this property on 5213 Kevins Way, with a current market value of $292,857, his total monthly income (July 2020) is $2,150. His total monthly expenses (July 2020) are $845. So his NOI is:

$2150 (Income) – $845 (Expenses) = $1,305 (NOI)

Pro Tip: Chris’ monthly NOI of $1,305 (and Annual NOI of $15,660) is calculated automatically on Stessa on a pro forma basis, for those of you that want to skip all the manual labor.

To take this a step further, both to be able to accurately evaluate a deal and predict your financial status after debt payments, you can take a look at Cash Flow. Cash Flow takes your NOI and subtracts all debt payments (HELOC interest, construction loan and mortgage payments, etc). Read more on Cash Flow or watch the video.

Learn about other important metrics every real estate investor should know on our blog or YouTube channel.

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