Essential Real Estate Calculation #1: Net Operating Income (NOI)
For investors that aren’t already familiar with Real Estate Syndications, it involves multiple investors pooling their capital together to purchase no-hassle, hands-off investment properties that deliver passive income and appreciation to the investor. For additional details on real estate syndications, we recommend checking out the following blog posts:
One of the keys to selecting a great real estate syndication investment is performing due diligence and detailed analysis on the Sponsor, Market, and the Property. Our team here at Limitless Investing independently reviews every syndication opportunity prior to sharing with our investors to ensure they are only receiving high-quality, pre-vetted opportunities.
With that said, we believe it is important for investors to understand the Essential Real Estate Calculations that are utilized as part of this analysis. Today we will be exploring the first calculation, and one of the key drivers of a value-add business plan: Net Operating Income (NOI)
What is NOI?
Net Operating Income (NOI) is a calculation used to determine the value of an income-producing real estate property by taking the revenue from the property and subtracting the operating expenses.
The operating expenses do not include taxes, mortgage payments, capital expenditures, depreciation, and amortization.
You may have seen this metric referred to as “EBIT” in other industries, which is shorthand for earnings before interest and taxes.
Why is NOI important?
NOI indicates whether a property generates enough net income to justify the cash required to invest in the property. It essentially tells the investor whether the property is profitable or not.
In addition to being a great standalone metric, NOI is also a key input in the property’s capitalization or cap rate which is used to determine the property’s overall value. This can then be used to compare one investment property to another when evaluating multiple investment opportunities. We will be diving into cap rates further in our next post so be sure to subscribe to the blog.
How do I calculate NOI?
To calculate NOI, you need to subtract the Real Estate Revenue from the Operating Expenses:
Net Operating Income = Real Estate Revenue - Operating Expenses
Common examples of Real Estate Revenue would include:
While common Operating Expenses would be:
Property management fees
If the calculation outputs a positive number, it means the property is generating more revenue than the operating expenses. However, if the calculation is negative, where the operating expenses are higher than the revenues, the result would be a Net Operating Loss (NOL).
And there you have it! You are now armed with one of the most essential real estate calculations. If you’d like to explore how no-hassle, hands-off real estate syndications can produce very strong NOI’s, don’t hesitate to reach out to discuss your investing goals and subscribe to our blog for future content!
If you’re interested in learning more about investing in a real estate syndication, download your free copy of our eBook, Achieving Financial Freedom by Investing in No-Hassle, Hands-Off Real Estate