How to Calculate Net Operating Income (NOI) – Week3
By.. “Venu Vankadhara, Real Estate Investor”
Net operating income (NOI) is simply the annual income generated by an income producing residential/commercial property after deducting yearly expenses from yearly income. It plays a major role in deciding a whether property is a good investment or not? Hence it is very important for a real estate investor to understand this thoroughly.
NOI = Yearly income – Yearly expenses
Yearly income – This would includes rental income
Yearly Expense - This would include expenses for management, legal and accounting, insurance, janitorial, maintenance, supplies, taxes, utilities, Vacancy (usually 5%) etc.
Subtract the yearly expenses from the yearly Income to arrive at the Net Operating Income.
For example, let’s say a residential rental property generates a yearly income of $24,000 and yearly expenses are $4,000. NOI would be $24,000- $4000 = $20,000.
Estimating the Value of the investment property = NOI * 10
In the above example you can buy an investment property up to $20,000 * 10 = $200,000. That means you are earning 10% a year on the property. This is a very good return but in current housing market where home values are going up due to low inventory, you need to be ready to take 7 to 8% return a year. In this example where NOI is $20,000, you can pay up to $260,000 for a house.
Real estate property that generate around 8% return on investment is a good investment
Useful Link - http://www.coachcarson.com/rental-property-cash-flow/
Next Week Topic: Property Management
"Venu Vankadhara, Real Estate Investor"
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