The Right Way to Calculate Net Operating Income (NOI)

What is net operating income or NOI anyway? NOI is the income derived from a property after all expenses except the cost of financing, or "debt service" have been subtracted. Since debt is voluntary (assuming you're filty stinking rich), think of NOI as the money you put in your jeans at the end of the year after you've paid for all other expenses. When you boil it down, determining NOI is a fairly simple process of adding up all your income and subtracting all your expenses. That said, a lot of people make serious mistakes when trying to calculate their NOI or when estimating the NOI of a potential purchase.

Often, newer investors don't take into consideration such things as vacancy and bad debt when calculating NOI. These are real expenses that should be accounted for when doing your calculations as they have a direct effect on the value of the property. Other overlooked items that should be taken into consideration are things like realty taxes, property insurance, off site management, legal and accounting fees, supplies like cleaners, brooms and mops, and payroll expenses if the property is large enough to have maintenance workers onsite.

Without a clear understanding of what NOI is and how it is calculated, you'll have a really hard time getting a handle on the real rate of return for a given property.

Example:

The numbers in the above example aren't really important, what is valuable about this kind of format is that it makes the process of analyzing the NOI very simple. If you'd like a copy of this in Excel format, please email me at: info@ocre.ca

With this information as well as a desired rate of return, you can easily calculate the value of any piece of property. Powerful and simple.