Friday, January 17th, 2020 January17th2020

Sell for More Trivia: What is Net Operating Income?

Published on January 17th, 2020

Sell for More Trivia is a weekly blog series that playfully presents a trivia question about commercial real estate.

 

Net Operating Income or “NOI” is the most important calculation in commercial real estate. Yet, few sellers understand it. Let’s keep it simple and fix that.

What is NOI?

NOI is what’s left over after adding all income from operations and deducting all operating expenses for a given year.

Note: Operating Expenses do not include a mortgage payment.  The idea is to show the buyer how much cash flow he’ll earn in the first year of ownership…if the buyer pays all cash for the property.

The NOI formula is as follows:

Current annual rent roll plus any other misc. income – annual expenses to operate the property

The calculation is unique to the property…not the investor.

What expenses are “Operating Expenses”?

Operating expenses include all cash expenditures necessary to operate the property like real estate taxes, personal property taxes, insurance, property management fees, utilities, repairs and maintenance, and other miscellaneous expenses such as accounting and legal services.

Remember, do not include these expenses in the calculation: mortgage, depreciation, income taxes, tenant improvements, leasing commissions or capital expenditures.

Note: Capital expenditures are major expenses that occur irregularly like the replacement of the HVAC system in a property. Capital expenditures are depreciated not expensed.

What does the Cap Rate have to do with this?

Lastly, you should know that the NOI is a major component of the cap rate calculation.

Cap Rate = NOI / Asking Price

So a property with a $1,000,000 asking price and an 8% cap rate is generating $80,000 of net operating income.

 


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About Beau Beach, MBA CCIM

Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.

Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee and South Florida markets.

He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.

Beau can be reached at 800-721-3287, click to schedule a call or Beau@BeachwoodSells.com