Net operating Income (NOI) is an important number in real estate investing because it is used in two very important real estate ratios, The Capitalization Rate (CAP Rate) and the Debt Service Coverage Ratio (DSCR).
The Net Operating Income is calculated by taking all of a property's Operating Incomes such as:
- Rents
- Parking revenues
- Laundry revenues
- Vending revenues
- Any other incomes received
and then deducting all of the property's Operating Expenses such as:
- Property Taxes
- Insurance
- Maintenance & Repair Costs
- Caretaking & Management Fees
- Snow & Garbage Removal Costs
- Utility Costs
- Supplies
- Vacancy Costs
- Advertising Costs
- Accounting Fees
- Legal Fees
- Security Costs
- Annual Fire Alarm Testing Costs
- Any Other Operating Expenses
Please note that Operating Expenses DO NOT INCLUDE Debt Service, Income Taxes, Depreciation or Capital Expenditures.
When comparing real estate investment options it is important to ensure that the statements given to you by the seller are complete and accurate. If the statements do not contain numbers for all of the above possible expenses (and they very seldom ever will) then it is your responsibility as an investor to determine what those costs could potentially be for the possible building that you are looking at purchasing and then re-adjust the statements given to you to accurately assess a property's earning potential.
It is also helpful to determine "rules of thumb" for your market area. For example in the Winnipeg real estate market it is common for expenses to average 50% to 55% of Potential Gross Rents. Some Income and Expense Statements for buildings will have less than that and it may be due to omitted expenses or to an unusual building configuration such as all utilities being separately metered and paid by the Tenants. Either way it is your responsibility as the person putting your hard earned money on the line to know what you are getting yourself into.
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