Before you continue with this exercise for calculating NOI, or Net Operating Income, for a rental property, you may want to refer to our previous post about GOI, or Gross Operating Income and Gross Potential Income. We’ll need those calculations for this exercise.
Net Operating Income, NOI, is the income realized by a rental property after all operating expenses are taken out. This calculation does not include the mortgage payments, as they’re not an expense of operation. It’s also not accurate to base purchase decisions on a NOI that includes mortgage payments, as the new buyer could be paying cash or getting a lower mortgage or interest rate. So, we’re wanting only to find out how a property is performing based on the rents it receives and the expenses it takes to operate. These expenses include:
- Management salaries/fees
- Maintenance and repair costs
- Legal and Accounting
So, to calculate the NOI for a duplex with a Gross Operating Income of $15,456, we would take the GOI and subtract all expenses. Let’s say that our expenses on this self-managed duplex total $2800/year. We subtract it from GOI, as $15,456 – $2800 = $12,656 for a NOI.
Our GOI came from two units rented for $700/month each and with a vacancy and credit loss history of 8%.
These are numbers used by rental property investors in calculating Capitalization Rate, or Cap Rate for properties. Cap rate is used to compare properties to each other and the market to determine which are the best buys. We’ll learn cap rate in another post. For now, getting proficient in calculating Gross Potential Income, Gross Operating Income and Net Operating Income will allow you to come up with these numbers very quickly if you have the income and expense figures for a property.