When it comes to real estate investing, there are lots of terms to know like ROI, Cap Rate and NOI.
In this article, we’re going to discuss how to calculate NOI or Net Operating Income.
NOI is the basis for determining the purchase price or value of an apartment complex.
Knowing how to figure it out is critical to your profitable real estate investing career.
If you recall from my last post, the “4 Reasons Apartments are a Great Wealth Builder“, we talked briefly about NOI and the cap rate.
The capitalization rate (Cap Rate) is expressed as a percentage to reflect the value of income producing properties like apartment buildings.
The cap rate is based on local market conditions and you should know that the lower the Cap Rate the higher the value of the property.
How to figure an apartment’s NOI
The first step to determine NOI is to calculate Total Income.
Total income is simply the total of all income streams from the property for the year and can include:
• Rents from the apartments themselves
• Laundry and vending machines
• Parking fees
• Late fees
• Any other income
For a simple working example, let’s say that we’re looking at a 100 unit complex where every unit rents for exactly $1,000 per month – ha ha, wouldn’t that be nice?
The complex has on-site laundry facilities and several vending machines that generate $1,000 per month in income.
Also, this complex features preferred parking spots for $100 per year and 50 units have them for an annual total of $5,000.
So what’s the Total Income?
1. 100 units X $1,000 per month = $1.2 million annually for rent income
2. $1,000 per month in laundry and vending = $12,000 annually
3. $5,000 parking fees annually
Our total income is $1,217,000 for this complex.
Now we can find the NOI by subtracting all the Expenses from the total income.
Here’s a list of potential expenses that an apartment complex might have:
• Management fees
• Trash collection
• Pool service
• Taxes and insurances
• Accounting and legal
And NO…the mortgage payment of principal and interest are not considered an expense for calculating NOI.
Let’s say that all of our annual expenses on this 100 unit apartment complex comes out to about $517,000.
So what is our NOI?
$1,217,000 – $517,000 = $600,000
The NOI in this example is $600,000.
Figuring purchase price
Let’s pick up on that cap rate again.
Let’s say that we’re using a cap rate of 10 or expressed as a percentage – 10%
We divide $600,000 by .10 and we get $6,000,000 as the purchase price or value for this apartment complex.
Do you see how important NOI is?
If we base the purchase price on total income it would be twice as high.
The true beauty of buying apartments is that the income after paying expenses determines value.
It’s all about the numbers.
In the next article, we’ll compare apartment and single family home investing.
By the way if you want to know more right now and are excited about how you can profit from apartments, please get in touch with us.
We’re happy to discuss anything you’d like and to answer all of your questions in detail.