I've done a rental analysis and have a question about the NOI
Member since 2022 · 12 posts · 2 votes
I've done a rental analysis on a potential rental property where I'd be charging $4200/month and the monthly expenses have come to $3635(Mortgage, tax, insurance, vacancy, cap ex, maintenance, Manage, HOA). The report says my NOI is $20,585.72. But if I got the formula correct ( NOI= annual income - annual expense) when I do it manually it comes to $50,400 - 43,627.2 = $6,772.80. What am I missing?
Thanks
I was going to say I have $50 that says you included the entire mortgage payment as an expense…it’s not. You need to replace the mortgage payment in your income minus expense calculation with just the interest and taxes, nearly 1/3rd of your payment will be towards principle, which is not an expense.
But then I re-read your post. For some reason you're trying to figure out NOI? Is there a new guru in town? You're the second or third person to ask about NOI on rental properties this week. NOI has no business in real estate calculations. Net OPERATING income, means the income if you purchased the BUSINESS for cash. So it's easier to compare the business without the financing clouding the comparison.
So…delete NOI from your real estate dictionary/language. But the answer to your question is neither the principle nor the interest count in NOI. So it means nothing if you plan to borrow money.
@Account Closed
I honestly don't bother with NOI that much, but I thought its net operating expenses. cap ex, vacancy, and in some ways maintenace are NOT operating expenses. Or, to be clearer, "fixed" operating expenses...
Personally, management may not be an operating expense, or rather its YOUR operating expense. For example, I self manage so I don't have management fees to consider.
Again, this why its usually best to run YOUR OWN numbers, YOUR OWN way. Since we aren't accountants, or at least I'm not, trying to follow every definition perfectly as if we were following accounting principals just isn't reasonable, to me anyway... (I guess I'm a "free spirit" lol).
Like I said, I usually see it with "fixed" operating expenses (I think some call it "front end" --- actually I get confused which is the back and which is the front.). Hope that helps.
@Account Closed
oh... factors such as maintenance, capex, etc. are variable to your investing estimates. You and I might find different costing contractors or selecting more or less costly finishes or capital equipment. So, only the fixed costs are truly able to be calculated to be an "apples to apples" comparison for everybody...
If I put my expenses in the renal calculator shouldn't it compute the NOI base on those assumptions that I am using? I inputed my expected expenses as well as my expected income, interest rate, etc.
I was going to say I have $50 that says you included the entire mortgage payment as an expense…it’s not. You need to replace the mortgage payment in your income minus expense calculation with just the interest and taxes, nearly 1/3rd of your payment will be towards principle, which is not an expense.
But then I re-read your post. For some reason you're trying to figure out NOI? Is there a new guru in town? You're the second or third person to ask about NOI on rental properties this week. NOI has no business in real estate calculations. Net OPERATING income, means the income if you purchased the BUSINESS for cash. So it's easier to compare the business without the financing clouding the comparison.
So…delete NOI from your real estate dictionary/language. But the answer to your question is neither the principle nor the interest count in NOI. So it means nothing if you plan to borrow money.
@Account Closed I suppose…. But calculators, in general, are notoriously limited. There are so many different conditions/permutations they can’t cover them all. That’s why investors need to learn to run the calculations themselves. You seem to know what you want calculated, it’s still mainly addition, subtraction, and bit of multiplication/division…
@Bill B. sure noi has a place in real estate investing. It’s still used in multi family to generate a cap rate for investing comparison, although I believe isn’t intended for valuation for residential. It’s just another stat..
For sure it’s primary for commercial properties, including anything with 5 or more living units…
I was going to say I have $50 that says you included the entire mortgage payment as an expense…it’s not. You need to replace the mortgage payment in your income minus expense calculation with just the interest and taxes, nearly 1/3rd of your payment will be towards principle, which is not an expense.
But then I re-read your post. For some reason you're trying to figure out NOI? Is there a new guru in town? You're the second or third person to ask about NOI on rental properties this week. NOI has no business in real estate calculations. Net OPERATING income, means the income if you purchased the BUSINESS for cash. So it's easier to compare the business without the financing clouding the comparison.
So…delete NOI from your real estate dictionary/language. But the answer to your question is neither the principle nor the interest count in NOI. So it means nothing if you plan to borrow money.
The confusion might center around the difference between NOI and cash flow. NOI is calculated by subtracting all expenses from the gross income. Debt, i.e., mortgage payments, are NOT considered an expense. Cash flow is the amount of money you put in your pocket and is calculated by subtracting your debt payments from the NOI.
Granted, if one does not take out a loan, NOI equals cash flow. However, if you take out a loan, your cash flow is ALWAYS less than the NOI. It's incomprehensible how one could say NOI "has no business in real estate calculations". I don't think there is anyone on the planet--correction: any OTHER person on the planet--who would buy a property without calculating the NOI.
You indicated that, "it’s easier to compare the business without the financing clouding the comparison". Here, you are saying that it's easier to compare businesses based on their NOIs rather than their cash flows. In other words, NOI is an essential parameter in your real estate calculations.
No. I said NOI made it easier to compare businesses. Because the financing will be different for just about every business.
Real estate financing on the other hand will be almost identical for the same property type. (Which most investors stick to.)
When comparing real estate investments some people want cashflow some people want ROI, (even if ROE is more important) almost nobody in the 1-4 SFR market cares about NOI. That's more useful in medium to large multifamily. Where again. The financing costs can vary wildly.
I was going to say I have $50 that says you included the entire mortgage payment as an expense…it’s not. You need to replace the mortgage payment in your income minus expense calculation with just the interest and taxes, nearly 1/3rd of your payment will be towards principle, which is not an expense.
But then I re-read your post. For some reason you're trying to figure out NOI? Is there a new guru in town? You're the second or third person to ask about NOI on rental properties this week. NOI has no business in real estate calculations. Net OPERATING income, means the income if you purchased the BUSINESS for cash. So it's easier to compare the business without the financing clouding the comparison.
So…delete NOI from your real estate dictionary/language. But the answer to your question is neither the principle nor the interest count in NOI. So it means nothing if you plan to borrow money.
The confusion might center around the difference between NOI and cash flow. NOI is calculated by subtracting all expenses from the gross income. Debt, i.e., mortgage payments, are NOT considered an expense. Cash flow is the amount of money you put in your pocket and is calculated by subtracting your debt payments from the NOI.
Granted, if one does not take out a loan, NOI equals cash flow. However, if you take out a loan, your cash flow is ALWAYS less than the NOI. It's incomprehensible how one could say NOI "has no business in real estate calculations". I don't think there is anyone on the planet--correction: any OTHER person on the planet--who would buy a property without calculating the NOI.
You indicated that, "it’s easier to compare the business without the financing clouding the comparison". Here, you are saying that it's easier to compare businesses based on their NOIs rather than their cash flows. In other words, NOI is an essential parameter in your real estate calculations.
Thanks @Account Closed too.I didn't know that NOI does not include the mortgage payment. Am I correct in saying that NOI does however include the taxes and insurance as expenses along with HOA, vacancy, Capex,etc.?
@Roger Hector Roger, Cap Ex is not included as part of Op Ex.
NOI is calculated by deducting physical and financial vacancies, all applicable annual expenses including management fees from gross potential income, which includes all rental income (which assumes 100% rental space rented 100% for the entire year) plus all other income.
The value of an income producing asset is determined by capitalizing its NOI.
Capitalization is accomplished by dividing NOI by an assumed or stated Capitalization Rate (Cap Rate).
The Cap Rate represents the cash on cash return realized by a Buyer (investor) that paid all cash to purchase the property's NOI (also known as Net Before Debt).
Please let me know if you have any questions or would you like me to send a short Excel worksheet to more fully explain the above.
Hope this helps
@Roger Hector Roger, Cap Ex is not included as part of Op Ex.
NOI is calculated by deducting physical and financial vacancies, all applicable annual expenses including management fees from gross potential income, which includes all rental income (which assumes 100% rental space rented 100% for the entire year) plus all other income.
The value of an income producing asset is determined by capitalizing its NOI.
Capitalization is accomplished by dividing NOI by an assumed or stated Capitalization Rate (Cap Rate).
The Cap Rate represents the cash on cash return realized by a Buyer (investor) that paid all cash to purchase the property's NOI (also known as Net Before Debt).
Please let me know if you have any questions or would you like me to send a short Excel worksheet to more fully explain the above.
Hope this helps
@Barry Ruby yes absolutely, send whatever you think can help my education. I love learning and I'm learning a ton here on this thread. So let me ask you this, things that I set money aside for, like CapEx, repairs, and maintenance are not calculated in the deduction portion of the equation in calculating NOI because it's just my "saving for a rainy day" so that I have those funds set aside if I do need to repair/replace something? Also when you say "financial vacancy " do you mean actual vacancy that occurs when you don't have rental income from a tenent occupying the rental or are you saying it includes the planning for unexpected vacancy, the 5% taken out of rental income for the rainy day scenario?
No. I said NOI made it easier to compare businesses. Because the financing will be different for just about every business.
Real estate financing on the other hand will be almost identical for the same property type. (Which most investors stick to.)
When comparing real estate investments some people want cashflow some people want ROI, (even if ROE is more important) almost nobody in the 1-4 SFR market cares about NOI. That's more useful in medium to large multifamily. Where again. The financing costs can vary wildly.
Yes. Everything except capital costs. (Usually just interest but also PMI or any other cost you wouldn't have if you paid cash.)
@Account Closed that cap-ex items like a new roof, HVAC system… are not used to calculate NOI. However, you should treat monthly contributions to your reserve account, which is ultimately used to pay cap-ex, as an expense.
@Account Closed
I'm saying I don't use NOI because that doesn't include financing costs. I include financing costs in my calculations because they are usually the biggest cost in owning real estate.
So I include all income and expense when calculating ROI and after the first year ROI becomes less and less relevant and I change to ROE.
You have to do some voodoo on calculating appreciation as that will usually create more return than the rent. (Imagine you put down 20% and and get 4% appreciation. That's a 20% return. So unless your rent also returns over 20% it's a big deal.when I started by buying a new primary every year with 5% down you can imagine 4% appreciation being an 80% ROI, hard for rent to compete with that.)
ps. When I said "capital costs" weren't included in NOI, I meant the cost of getting capital. (Interest, PMi, appraisals, underwriting, etc.)
No. I said NOI made it easier to compare businesses. Because the financing will be different for just about every business.
Real estate financing on the other hand will be almost identical for the same property type. (Which most investors stick to.)
When comparing real estate investments some people want cashflow some people want ROI, (even if ROE is more important) almost nobody in the 1-4 SFR market cares about NOI. That's more useful in medium to large multifamily. Where again. The financing costs can vary wildly.
@Account Closed so for cash flow I've been calculating my rental income minus everything I take out each month, mortgage if financed, (including PMI, property taxes and insurance), HOA if any, management fees, and everything for my reserve fund(vacancies, maintenance , Capex,. ROI I've been calculating it by assuming it will be financed. So for my total out of pocket I use my down payment, closing costs, rehab costs, attorney fees, points (depending on deal structor) realtor fees(depending on how the deal is structured), inspections(depending on how deal is structured), etc. Any cash that I have to physically take out of my bank before and at closing. For my ROI I then take my annual cash flow/total all in cost. That's how I've been doing it.
@Account Closed
So, after all of this, have you figured out the discrepancy with the calculator program as you asked about in your OP?
@David M. I have. I've been including ALL of my expenses like vacancy, maintenance, Capex, and mortgage in calculating my NOI. But I've learned that the deduction from gross anticipated income are those things that I would have if I paid cash(property taxes, insurance, management, HOA if any. And not mortgage, PMI, reserve allotments(vacancies, maintenance, Capex )
No. I said NOI made it easier to compare businesses. Because the financing will be different for just about every business.
Real estate financing on the other hand will be almost identical for the same property type. (Which most investors stick to.)
When comparing real estate investments some people want cashflow some people want ROI, (even if ROE is more important) almost nobody in the 1-4 SFR market cares about NOI. That's more useful in medium to large multifamily. Where again. The financing costs can vary wildly.
@Account Closed so for cash flow I've been calculating my rental income minus everything I take out each month, mortgage if financed, (including PMI, property taxes and insurance), HOA if any, management fees, and everything for my reserve fund(vacancies, maintenance , Capex,. ROI I've been calculating it by assuming it will be financed. So for my total out of pocket I use my down payment, closing costs, rehab costs, attorney fees, points (depending on deal structor) realtor fees(depending on how the deal is structured), inspections(depending on how deal is structured), etc. Any cash that I have to physically take out of my bank before and at closing. For my ROI I then take my annual cash flow/total all in cost. That's how I've been doing it.
@Roger Hector Roger, Cap Ex is not included as part of Op Ex.
NOI is calculated by deducting physical and financial vacancies, all applicable annual expenses including management fees from gross potential income, which includes all rental income (which assumes 100% rental space rented 100% for the entire year) plus all other income.
The value of an income producing asset is determined by capitalizing its NOI.
Capitalization is accomplished by dividing NOI by an assumed or stated Capitalization Rate (Cap Rate).
The Cap Rate represents the cash on cash return realized by a Buyer (investor) that paid all cash to purchase the property's NOI (also known as Net Before Debt).
Please let me know if you have any questions or would you like me to send a short Excel worksheet to more fully explain the above.
Hope this helps
@Barry Ruby yes absolutely, send whatever you think can help my education. I love learning and I'm learning a ton here on this thread. So let me ask you this, things that I set money aside for, like CapEx, repairs, and maintenance are not calculated in the deduction portion of the equation in calculating NOI because it's just my "saving for a rainy day" so that I have those funds set aside if I do need to repair/replace something? Also when you say "financial vacancy " do you mean actual vacancy that occurs when you don't have rental income from a tenent occupying the rental or are you saying it includes the planning for unexpected vacancy, the 5% taken out of rental income for the rainy day scenario?
@Roger Hector Roger, Cap Ex is not included as part of Op Ex.
NOI is calculated by deducting physical and financial vacancies, all applicable annual expenses including management fees from gross potential income, which includes all rental income (which assumes 100% rental space rented 100% for the entire year) plus all other income.
The value of an income producing asset is determined by capitalizing its NOI.
Capitalization is accomplished by dividing NOI by an assumed or stated Capitalization Rate (Cap Rate).
The Cap Rate represents the cash on cash return realized by a Buyer (investor) that paid all cash to purchase the property's NOI (also known as Net Before Debt).
Please let me know if you have any questions or would you like me to send a short Excel worksheet to more fully explain the above.
Hope this helps
@Barry Ruby yes absolutely, send whatever you think can help my education. I love learning and I'm learning a ton here on this thread. So let me ask you this, things that I set money aside for, like CapEx, repairs, and maintenance are not calculated in the deduction portion of the equation in calculating NOI because it's just my "saving for a rainy day" so that I have those funds set aside if I do need to repair/replace something? Also when you say "financial vacancy " do you mean actual vacancy that occurs when you don't have rental income from a tenent occupying the rental or are you saying it includes the planning for unexpected vacancy, the 5% taken out of rental income for the rainy day scenario?
@Barry Ruby thanks for taking the time out to educate me. It's greatly appreciated. For some reason it won't let me put my email here but it's a gmail account Carioca Investment Group without any spaces between each word. Thanks again
No. I said NOI made it easier to compare businesses. Because the financing will be different for just about every business.
Real estate financing on the other hand will be almost identical for the same property type. (Which most investors stick to.)
When comparing real estate investments some people want cashflow some people want ROI, (even if ROE is more important) almost nobody in the 1-4 SFR market cares about NOI. That's more useful in medium to large multifamily. Where again. The financing costs can vary wildly.
@Account Closed so for cash flow I've been calculating my rental income minus everything I take out each month, mortgage if financed, (including PMI, property taxes and insurance), HOA if any, management fees, and everything for my reserve fund(vacancies, maintenance , Capex,. ROI I've been calculating it by assuming it will be financed. So for my total out of pocket I use my down payment, closing costs, rehab costs, attorney fees, points (depending on deal structor) realtor fees(depending on how the deal is structured), inspections(depending on how deal is structured), etc. Any cash that I have to physically take out of my bank before and at closing. For my ROI I then take my annual cash flow/total all in cost. That's how I've been doing it.
@Account Closed wow, what great information and insight. Can't thank you enough.