SS168: What is NOI in Real Estate

SS168 What is NOI in Real Estate

NOI is a commonly used term when discussing the profitability of a property. In this episode, Charles discusses NOI, its meaning, and why it is an important metric to understand when investing in real estate.

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Talking Points:

  • Net operating income or NOI is a financial metric used to determine the profitability of income-producing real estate investments. The NOI is calculated by subtracting all operating expenses from the total or gross revenue generated by the property.
  • The net operating income is a pre-income tax calculation that does not include debt payments, capital expenditures, depreciation, and amortization.
  • The financial formula works by considering all of the income generated by a property. For example, a property earns revenue by renting units to tenants, but it might also produce income by offering coin laundry machines, VIP parking spaces, trash services, etc. All of this income would be included in the net operating income calculation. By including all of the income and operating expenses in the formula, investors get an accurate assessment of the property’s performance.
  • The net operating income is one of the most important factors for real estate investors because it allows them to determine their estimated return on investment. At the same time, lenders will review the NOI to consider the property for financing.
  • What is not included in the net operating income?
    • Debt service. A big item that is missing from the NOI calculation is debt servicing. Debt service includes principal and interest payments, which are excluded from the net operating income since different investors will capitalize on the same property differently. One investor may leverage the property with a loan that is 70% loan-to-value. In contrast, another investor might only utilize 50% loan-to-value financing, while a third investor might pay cash for the same property. By excluding debt servicing from the calculation, investors can compare properties strictly by their income and operating expenses.
    • Capital expenditures. When operating an investment property, there will be years when more capital investment is required than others. These capital expenditure projects could include new mechanicals, a new roof, a new parking lot, etc. Since these projects vary from year to year, and the lifetime of these improvements is many years, sometimes decades, we do not include this in the NOI calculation.
    • Income taxes and depreciation. NOI is a pre-income tax formula since, like debt service, income taxes vary widely from investor to investor. Depreciation is not an actual expense because you never pay for depreciation like you would property management, but rather, it is an accounting concept, and it is also not included in the net operating income.
  • How can investors increase their property’s NOI?
    • Reduce operating expenses. Always get multiple bids for work, and regularly send your vendor contracts to bid with other service providers. Integrate as many automated tasks into your workflow as possible and minimize unit turnover. However, you need to be careful not to negatively affect your property by reducing too many expenses.
    • Increase income. What other income-generating services can you implement at your property? VIP parking, valet trash, or laundry services. Also, what could you add to your property or change at your property that will allow you to increase the rent you charge to all your tenants?

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what is NOI in real estate.

Charles:
Have you always wanted to invest in real estate, but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties and great locations that provide us with consistent passive income. While we wait for appreciation in the future and take advantage of tax laws while we’re waiting and unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out to investwithharborside.com. If you like the idea of investing real estate, if you like the idea of passive income partner with us at investwithharborside.com, that’s investwithharborside.com.

Charles:
Net Operating income for NOI is a financial metric used to determine the profitability of income producing real estate investments. The NOI is calculated by subtracting all operating expenses from the total or gross revenue generated by the property.

Charles:
The net operating income is a pre income tax calculation that does not include debt, payments, capital expenditures, depreciation, and amortization. The financial formula works by considering all the income generated by a property. For example, a property earns revenue by renting units to tenants, but it might also produce income by offering coin laundry machines, VIP, parking spaces, trash services, et cetera. All of this income would be included in the net operating income calculation. By including all the income and operating expenses in the formula, investors get an accurate assessment of the property’s performance. Now, the net operating income is one of the most important factors for real estate investors because it allows them to determine their estimated return on investment. At the same time, lenders will review the NOI to consider the property for financing. So what does not include in the OP net operating income? Well, number one is debt service.

Charles:
A big item that’s missing from the NOI calculation is debt servicing. Debt service includes principal and interest payments, which are excluded from the net operating income. Since different investors will capitalize the same property differently, one investor may leverage the property with a loan that is 70% loan to value. In contrast, another investor might only utilize 50% loan to value financing, while a third investor might pay a hundred percent cash for the same property. By excluding debt servicing from the calculation, investors can compare properties strictly by their income and operating expenses. Next is capital expenditures. When operating an investment property, there will be years when more capital investment is required than others. These capital expenditure projects could include new mechanicals, a new roof, a new parking lot, and since these projects vary from year to year in the lifetime of these improvements is many years, sometimes decades.

Charles:
We do not include this in the NOI calculation. Next is income taxes and depreciation. NOI is a pre income tax formula since like debt service income taxes vary widely from investor to investor. Depreciation is not an actual expense because you never pay for depreciation like you would property management, but rather it is an accounting concept and it is also not included in the net operating income formula. So how can investors increase their properties? NOY number one is reduce operating expenses. Always get multiple bids for work and rightly, send your vendor contracts to bid with other service providers. Integrate as many automated tasks into your workflow as possible and minimize unit turnover. However, you need to be careful not to negative negatively affect your property by reusing expenses too much. Next is increase income. What other income generating services can you implement at your property? VIP parking, valley trash laundry services, coin laundry machines. Also, what could you add to your property or change at your property that will allow you to increase the rent you charge to all your tenants? So I hope you enjoyed. Please remember to rate, review, subscribe, submit comments and potential show topics@globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs at syndicationsuperstars.com. That is syndication superstars.com. Look forward to two more episodes next week. See you then.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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