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Real estate is a business, and like every business, profit is the end result. Several factors tie into whether a piece of property is going to be a good investment. The number one key player in that is net operating income, or NOI. When dealing with properties that are rented (apartments, rental houses, commercial rental space), the NOI is the dollar amount that the property brings in minus any operating costs. The dollar amount is not limited to monthly rent. It also includes parking fees, permit fees or any other additional fees a property may maintain. The operating costs encompasses everything from minor and major repair, to insurance costs, property tax, and utilities.

Some Real Estate Investors think that NOI does not play an important role if one is focused on Flipping (buying and selling within short periods of time). On the contrary, smart buyers tend to look at real estate acquisitions from an INVESTMENT point of view, even if they are using the property for personal use. The NOI is a key factor that tells the buyer whether the acquisition is sound or not.

When deciding on whether or not to purchase a property, or to encourage a potential buyer who may wish to use a property as rental, it is important to have NOI data. Usually in these circumstances NOI auditors are brought in to verify the information.

Side Note: A Good Realtor should be able to do the math (NOI Audit) for you. GET one who understands Net Operating Income!

The auditors are used to the research to ensure the NOI numbers reflect the actual situation. NOI auditors will compare bank statements, proof of leasing for the reported amounts, verify reported operation costs, etc. Knowing the NOI of a property can assist with numerous factors in the future.

If one owns and operates a rental property, and wishes to take out a loan in order to provide major repairs or do renovations, the NOI data would provide a better footing with the bank. Lenders want to know that their money is going to be repaid, and if one who wants to borrow money from them can prove that the property is in good standing, then the likelihood of the lender having problems with that account is decreased. If a buyer is considering purchasing a piece of property, for the sake of renting, then the NOI is going to provide the same assistance with lenders as it does with the first example. NOI can also provide a clear picture of the potential a property possess. There are several calculations which the NOI is used for. The likelihood of profit growth, the estimated value of a business, and the property’s income and cash flow statements.

The bottom line is know the NOI of a property and be sure to verify the information given. If one is a buyer, hire your own NOI auditor to ensure that the property is reflecting truthful records. If one is a seller, be sure to have exceptional records which verify each element of the NOI. Not being aware of a property’s NOI, as a owner, can mean profit loss due to ignorance and creates the potential for foreclosure. In order to keep track of NOI there are several software packages out there, and third-party companies which assist with keeping accurate data. Do the research and find which one fits the needs of the property most.

Here is a simple form that should help you calculate the Net Operating Income.

Net Operating Income Form – CLICK TO DOWNLOAD THE FORM