Beginner stated NOI question

4 Replies

Hopefully this was not stated some where else in the forums but I could not find it.

I am browsing listings for small multi-family units in the metro Detroit Michigan area and reviewing the stated current rent and NOI. I am finding lots of properties that seem to show an extremely high NOI. One example is:

Monthly Rent $1600 and yearly NOI $14,500.

This tells me that they only have $4,700 in yearly expenses?  Taxes are $3,324 so that would leave $114 per month for other expenses which seems really off based on what I have been researching here on BiggerPockets.

Should I just ignore what they state as the NOI and start with the general guideline of 50% of current rents for expenses? How can they state such a high NOI?

@Michael S.  

There is a very large difference between Pro Forma NOI and actual. In metro Detroit, the numbers look great on paper - that's it :) Why - because paper shows a moment in time snap shot, which is Pro Forma; it does not take into account longevity and stability. You won't find either in metro Detroit... If you are on the ground and a very experienced operator to boot, you can make it work. Otherwise, just a pipe dream :)

@Michael S. , they are not only misrepresenting expenses--they are probably ignoring some completely and they are some of the biggest expenses.  These are vacancies and maintenance.  Unfortunately, there are several wholesalers in the Detroit area (probably in other areas also) who do this routinely.  The sellers often state that they can't properly quantify those expenses so they leave them out. That is BS.  I don't know if it is proper to put blog links here but I did post a blog based on a Detroit listing about 6 months ago.  I titled it "Magic House for Sale".  Here is the link: http://www.biggerpockets.com/blogs/4527/blog_posts/37258-magic-house-for-sale .  I'd be interested in your thoughts.

Proforma = Pretend.  If a seller wants to price their property based on proforma numbers they should take action to make those the actual numbers before selling.

The numbers in many unrealistic pro formas (those that aren't bordering on fraudulent) are technically accurate at the time of the listing;  however, since vacancies will occur at every property and maintenance will be needed for every property the pro forma numbers may not be accurate for very long.  What happens when you have to start an eviction proceeding for non payment of rent?  Pro formas should be read as if they have the common warnings:  "results are not typical" or "your results may vary".

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