Net Operating Income

NYC Net Operating Income: NOI Calculator

Seasoned investors know Net Operating Income or NOI as the most critical calculation in analyzing a successful investment property. NOI measures your rental property’s profitability before adding mortgage financing or income taxes. Use our calculator below to estimate your Net Operating Income NOI, including the Cap Rate on an investment property you own or are planning on buying.

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Net Operating Income – NOI Explained

One of the most important calculations for real estate investors when assessing a potential investment is its Net Operating Income NOI. The NOI calculation is one of the best metrics for determining the profitability of a real estate investment. It’s also for determining other essential metrics such as cap rate, debt service coverage ratio, and your return on investment (ROI).

This guide will take you through everything you need to know to help you understand what NOI is and how to use it. In addition, our calculator will also allow you to quickly determine your NOI by entering your property’s details below.

What is NOI?

NOI can be best understood as the operating profit of a real estate investment. It is calculated by deducting the operating expenses from the income of a property. Investors often use NOI as their primary valuation metric when analyzing and comparing different properties. By calculating a property’s NOI, an investor can immediately know the revenue potential of an investment. This is useful information for investors and lenders as it tells them whether an investor will have enough cash flow to cover their mortgage payments.

However, investors need to remember that an NOI calculation will not factor in the cost of your mortgage. It’s also not the same as Net Cash Flow (NCF). A property’s NCF is its total income (cash inflows) minus total expenses (cash outflows) over a certain period. NCF is typically calculated on an annual or monthly basis through the equation:

NCF = NOI – mortgage payments

How to Use the NOI Calculator

Calculating a property’s NOI is pretty straightforward; you only need a monthly gross operating income and expenses breakdown. To help you get started, let’s take an example. A property investment you have your eyes on will bring in $4,000 per month in total rent. Using the NOI calculator above, you would input:

• Monthly Rent – $4,000

Now for expenses. Let’s assume your annual costs are as follows:

• Real Estate Taxes – $5,000
• Insurance – $500
• Utility – $1,200
• Repairs and Maintenance – $2,000
• Property Management – $2,400
• Common Charges – $9,600
• Other Operating Expenses – $0

After adding all these figures to the calculator, you end up with the following results:

• Total Annual Income – $48,000.00
• Total Operating Expenses – $20,700
• Net Operating Income (NOI) – $27,300

This is useful information, but you must determine your Cap Rate and Gross Rent Multiplier (GRM). The Cap Rate will help you work out your expected ROI, while the GRM is a useful metric for comparing the profitability of similar properties.  To work those out, the final figure to add will be the property’s market value (how much it is worth in the current market). For this example, let’s say the home has a property value of $800,000, which gives the following results:

• Cap Rate – 2.73
• GRM – 20.83

Generally, a property with a cap rate of 8% to 12% is considered pretty good. However, like other metrics, what’s considered “good” can depend on various factors. Similarly, a “good” GRM depends heavily on the type of rental market the property is located in, but you’ll want to aim for a GRM of between four and seven. A lower number means paying off your rental property will take less time.

How to Interpret NOI

Once you know a property’s NOI, the next and final step will be interpreting that information. For a start, a property’s NOI can immediately give you a clear picture of its potential cash flow. You can also use NOI to determine how well a property is being managed compared to similar properties in the area and how its performance has changed over time. Any property with a declining NOI should be considered a red flag.

Another use for NOI is as a crucially important metric in your mortgage application. Any property with a negative NOI will have almost no chance of receiving an approved loan. In addition, the higher a property’s NOI is, the better the chance of obtaining a low-interest mortgage loan.

Can a Property’s NOI be Changed?

Your first NOI calculation of a property isn’t necessarily set in stone. You can increase a property’s NOI by decreasing operating expenses or raising the monthly rent. However, be cautious as this can backfire by making the property less appealing to potential tenants, resulting in long vacancy periods and decreasing market value due to deferred maintenance.

When determining how much to charge in rent, look at market comps in your area. The general rule is that monthly rent should be 2% of the property’s value. However, this is only a rough estimate to be used as a starting point and should not be considered a substitute for doing your research.

Lastly, another thing to be kept in mind is that while NOI is a powerful metric, you can manipulate it. A dishonest property owner could try to present a higher NOI by deferring some operating expenses until the following year. This is why it is vital to do your research and calculations rather than relying on whatever the owner says. In short, perform your due diligence.