Net Operating Income (NOI)
Will this property provide me with enough cash flow to pay the loan?
- Net Operating Income as a gain generated by property
- What is income and expense in terms of NOI
- NOI calculation formula
- SWORP TIP!
The number you get from calculating your annual NOI (Net Operating Income) has the potential to be as much of a source of infinite happiness as a rude awakening. It is a very visible indicator that your property investment might in the end become a bitter letdown. Learn to use it as a fishtail that navigates you through the heavy cash flows.
Allow me to unleash a bit of imagination here. Envision you, the investor, like a sea, where every river flows. Those river flows are taxes, maintenance, insurance, rent, mortgage, and every income, and expense accompanying property ownership you can possibly imagine.
Along the way, before those rivers arrive at the sea, they might dry up or, to the contrary, even overflow. For you, like the sea, where the inter-dependence of every component shall strive to maintain as high level of balance as possible in order to not only survive but flourish as well, no oddities are desirable.
However, if your rivers have good sources of flow, if river banks are solid and dams are hard to breach, they will end up in your sea safely. Banks, dams, and mountain glaciers vital for your river flows are correct cash flow calculations prior to the property investment. The most solid mountain glaciers are desirable price and financing terms negotiations that ensure a steady stream of cash flow to the sea.
For this, you need to master NOI as a key cash flow calculation. NOI represents the gain your property generates (total rents received per year) after deducting all expenses except the debt service and taxes (e.g. mortgage payments). This way NOI is a valuable tool to judge a property’s ability to generate profit by showing if your investment will produce enough income to pay the mortgage.
maintenance and repairs
total annual rents
management fee (if applicable)
Real Estate renting fee (if applicable)
annual vacancy profit loss
NOI = Gross Rental Income - Operating Expenses
As always when working with raw numbers, beware of entirely relying on them, because you might get caught up. When using NOI to evaluate a potential investment, remember that projected rents could prove inaccurate the moment your tenants get insolvent, there is an unexpected long-term vacancy, etc. Also, if your property is improperly managed, your income could very quickly become inconsistent.
Input the numbers of your current investment to our NOI Calc and check out your property’s performance right now!