How to Estimate Net Operating Income of a Property
Estimating the net operating income of a property is extremely important when analyzing a deal. You will need to have access to income and expense statements for the subject property or similar buildings in the area to be able to accurately estimate NOI. Below are the four steps to reaching your number.
1.) Estimate the Potential Gross Income- Potential gross income is simply what you expect the building to realistically generate based on 100% occupancy and before taking out any expenses. Be sure to add in income from all sources including laundry machines, parking, or any other additional income that will be generated from the property.
2.) Subtract Out Vacancy - It is unlikely that your building will be rented out 100% of the time. Usually vacancy is expressed as a percentage, which can vary considerably by the type of property and the location. Find out what you can expect for vacancy from similar nearby properties.
3.) Estimate All Other Expenses For This Building - There's generally going to be three types of expenses here. The main two are fixed and variable. Naturally fixed expenses are those that remain the same regardless of the occupancy of the building. Variable expenses are any other expense for the most part. This can include snow removable, utilities, management fees, etc. This is where if you have the financials for this property or a similar nearby property you will have a major benefit.
4.) Subtract Lines 2 and 3 from Line 1 - This will result in your net operating income.
Net operating income can be used to value a commercial property, factoring into the Capitalization ratio formula. This is the most common use for this calculation, when evaluating the potential investment of a commercial property.