If you go by the full capacity numbers what you are looking at is Gross Potential Income & not Gross Operating Income. Calculations of Gross Operating Income that are made assuming full capacity can leave you wanting at the end of the year. ![]() Net Operating Income = Gross Operating Income – Operating ExpensesĪ word of caution here though! In calculating The Gross Operating Income for the year, it is important that you account for potential vacancies during the year. Simply put NOI, real estate, is a measure of the income you earn from the property through the year less the operating expenses that you need to incur to keep it operational. If you own a real estate property or are considering investing in one, the one thing that you certainly want to know is what is the Net Operating Income that it offers, as that is a measure of the return on your investments. Manage Your Real Estate Portfolio With BFPM ![]() Just like in corporate finance, NOI is a way to compare the core potential of different acquisition targets. Pro Tip: NOI is just a way for real estate investors to say EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization. In contrast, this NOI figure is pure in that it tells an investor how profitable an investment property is irrespective of whether the investor chooses to get financing, irrespective of the investor’s specific tax situation, and irrespective of how much depreciation the property can generate. So instead let’s use the NOI figure of $57,277 and divide that by the cost basis of $945,910 to get 6.06%, which is the cap rate. This would be a disingenuous metric to use because different properties have very real costs that vary which often can’t be controlled such as property taxes or common charges. However, we can just divide the annual revenue by the initial cost basis, as that would give you a gross yield vs the cap rate figure that we are after. And if you’re looking to see what your levered returns would be with financing, then check out our Rental Property Calculator. Pro Tip: Calculate net operating income and cap rates with our interactive Cap Rate Calculator. As a result, after subtracting for these expenses, you’re left with a net operating income of $57,277, or $4,773 per month of cash flow. Even though buying condo H06 insurance is optional for an all cash buyer, let’s assume you get a wall-to-wall condo insurance policy for $1,000 a year. Since the condo building pays for things like sewar, water and garbage pickup, there’s no need to factor any of these expenses in as a condo investor. Furthermore, let’s assume this property will be managed directly by the owner, hence no property management fee. There are no maintenance or repairs of substance to note, and we’ll assume a vacancy rate of 0% due to how hot the Miami real estate market is. The unit is a great condition, and also comes with furniture included so it’s ready to rent out, and at a higher rate because it’s furnished. Let’s use the higher and more conservative tax number. For property taxes, the TRIM notice states $11,785.74 if the new budget is adopted, or $11,326.03 if no budget change is adopted. ![]() For expenses, the unit has common charges of $1,161.47 per month, or $13,937.64 per year. Let’s do an example of a high floor, 05 line at the Biscayne Beach Condominium in the Miami neighborhood of Edgewater that should rent for at least $7,000 a month as of this writing. NOI can be expressed as a monthly or yearly income figure, but the latter is more common to see. Subtract operating expenses from revenue As you might expect, simply subtract your total operating expenses from your total revenue to get your net operating income, or NOI. Any other utility fees not paid by the tenant.Furniture and furnishings, if renting furnished.Here are some examples of operating expenses to consider: Capital expenditures get added to your cost basis, and are depreciated over time along with the rest of your cost basis. ![]() Capital expenditures, meaning major one-off repairs or improvements like a new roof, should also not be included in your operating expenses. Don’t factor in income taxes, if any, and don’t factor in non-cash “expenses” like depreciation. Add up operating expenses The next step is to add up all of the investment property’s expected cash operating expenses, assuming you purchased the property all cash and didn’t have to worry about a mortgage.
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