Net Operating Income - The Key Metric for Real Estate Investing
Are you an investor? Do you enjoy searching for a right deal to find in order to get a decent return on investment? When looking at various places to put your money, there's a number of factors one can use to determine if it's a good deal. Some people look at liquidity, marketability, leverage, management, tax implications, risk, and rate of return.
One critical method of comparing real estate investment opportunities is looking at the net operating income (NOI). This is the annual income generated by an income property after collecting all income from operations (rent or other income) and then subtracting all expenses required to operate the property.
Potential rental income
- Vacancy and credit losses
Effective rental income
+ Other income
Gross operating income
- Operating expenses
Net operating income
You will notice that the net operating income does not include financing or the tax status of the investor. Meaning, the NOI is unique to a specific property and offers a way to compare just based on the amount of cash a property will generate in a given year. The NOI value will drive the overall value of the property. For example, one can compare previously sold properties NOI and their sale price to determine a market capitalization rate (also known as cap. rate). Using this cap. rate, one can then value other similar investment properties and their respective NOI.
So what does this mean? As a buyer or seller of real estate investments, it makes sense to find ways to maximize the NOI for maximum returns.
Looking for other ways to value and compare various income properties? Then contact Josh Lavik & Associates to learn more about real estate investing in the Madison area.