Apex Software

Operating System

Net Operating Income and Real Estate Analysis

Net operating income (i.e., NOI) is one of the most important calculations made in regard to any real estate investment because it represents the property's potential income after all vacancy and operating expenses have been subtracted. In other words, net operating income represents the investment property's productivity, or measure of cash flow.

To help plant the idea, consider net operating income in one of the following two ways, depending on whether or not a mortgage exists.

The investor pays all cash for the property. In this case, since the investment property has no debt, NOI virtually becomes the rate of return expected from a property for any given annual period before taxes and depreciation are considered. In other words, given no deduction for debt service (loan payment), you can regard net operating income as the annual cash flow (cash flow before taxes, or CFBT).

The investor finances the property. Here, since the property has a mortgage, NOI should be regarded as the anticipated amount of cash flow available to pay the mortgage. In this case, only the remainder of NOI (net operating income less annual loan payment) becomes the annual cash flow before taxes (or CFBT).

How to Calculate Gross Scheduled Income Less Vacancy and Credit Loss = Gross Operating Income Less Operating Expenses* = Net Operating Income

Example: Assume that you want to do an analysis on an income property that generates a GOI of $100,000 with Operating Expenses of $42,000. What is the NOI?

$100,000 Less $42,000 = $58,000

*Mortgage payments, depreciation, and capital expenditures are not considered operating expenses and therefore have no impact on net operating income.

It's Role in Real Estate Investing

Net operating income plays a large role in a variety of real estate investment and holding period decisions. For instance, capitalization rate (cap rate) is calculated by dividing NOI by sale price. Likewise, property value (or the property's sale price) is calculated by dividing NOI by the cap rate.

Example: Let's continue to assume a net operating income of $58,000 (as in our example above) and a sale price of $580,000. What is the property's capitalization rate?

Net Operating Income Divided by Sale Price = Cap Rate

$58,000 Divided by $580,000 = 10.0%

Okay, now let's assume an NOI of $58,000 of and a cap rate of 8.0%. What is the property value?

Net Operating Income Divided by Cap Rate = Property Value

$58,000 Divided by 10.0% = $580,000

Net operating income also plays a large role with lenders. For example, Debt Coverage Ratio (DCR) is calculated by dividing the net operating income by loan payment.

Net Operating Income Divided by Annual Loan Payment = Debt Coverage Ratio

$58,000 Divided by $46,000 = 1.26

How Credible Is It?

Conceptually, NOI is important because of its use in numerous calculations surrounding property performance. Because it's used to estimate property value and cap rate, as well as useful to lenders, NOI has become an essential component of real estate investment analysis. As a real estate investor, therefore, you should understand net operating income, and recognize what it means to your potential investment valuation.

But be careful.

Remember, NOI is not unlike other calculations typically used for real estate investing purposes. The result is only as good as the numbers are credible, and numbers can be manipulated. Sellers have sometimes been known to become very creative in order to make the relationship between the price and NOI to come out right.

So here's a tip. Whether or not a property appears to have a favorable NOI with positive rates of return, don't just accept the numbers. Spend the time to validate the numbers. Reconstruct the owner's representations for income and operating expenses if necessary, and compute your own NOI. Whatever you do, rely on nothing less then the most credible net operating income possible. You can't afford not to.

About the Author

James Kobzeff is the developer of ProAPOD Real Estate Investment Software. Want to start working with rental property today? Discover how to create cash flow, rate of return, and profitability analysis presentations in minutes at => http://www.proapod.com

Microsoft Windows 7 Home Premium Upgrade from Windows XP or Vista $119.25 Software upgrade lets you record TV on your PCWindows Media Center allows you to watch, pause, rewind and record TV and moreOperating system is updated to manage a single TV guide

Microsoft Windows 7 Professional $229.99 Windows 7 Professional includes all Home Premium and business featuresSoftware eases your work demandsMicrosoft software connects company and home networks easily and more securely

Microsoft Windows 7 Ultimate $239.99 Windows 7 Ultimate gives you everything Home Premium and Professional offersMicrosoft software comes with added security featuresOperating system has the flexibility to work in multiple languages

Windows 7 For Dummies Book + DVD bundle $18.29 255 characters or less!

Mcts Self-paced Training Kit (Exam 70-680) (Paperback) $43.65 Announcing an all-new SELF-PACED TRAINING KIT designed to help maximize your performance on 70-680, the required exam for the new Microsoft Certified Technology Specialist (MCTS): Windows 7, Configuration certification.This 2-in-1 kit includes ...

Windows 7 for Dummies (Paperback) $16.33 Each book covers all the necessary information a beginner needs to know about a particular topic, using the series` signature set of symbols to clue the reader in to topics with such titles as: Tip, Remember, Warning!, Technical Stuff, and True Story, ...

Windows 7 Step by Step (Paperback) $16.33 A guide to the concepts and features of Windows 7 discusses such topics as how to get started, computer security, adding hardware and software, file and folder management, Internet connectivity, networking, and programs and gadgets.

Windows 7 Plain & Simple (Paperback) $14.76 A guide to Windows 7 covers such topics as running programs and gadgets, playing games, working with pictures, accessing the Internet, using voice and sounds, printing and scanning, networking, and maintaining security.

Teach Yourself Visually Windows 7 (Paperback) $19.59 Each illustrated guide offers visual learners a great beginner`s guide to a particular topic, augmenting step-by-step instructions with full-color photos, illustrations, or screen shots.

Windows 7 Simplified (Paperback) $16.33 Description not available.

Windows 7 For Seniors For Dummies (paperback) $16.33 255 characters or less!

Windows 7 Digital Classroom (Paperback) $26.15 Covering everything from the basic to intermediate level, a resource for the new Windows 7 operating system demonstrates how to customize settings, work with Internet Explorer, maintain and troubleshoot issues and more, in a book accompanied by a DVD w...

Microsoft Exchange Server 2007 $21.67 A guide to Microsoft Exchange server 2007 provides information on such topics as configuring Exchange clients, setting up mailboxes, using public folders, and performing backups and recovery.

Microsoft Windows Web Server 2008 R2 - 64-bit $439.49 Microsoft Windows Web Server 2008 R2 - 64-bit

Operating System Concepts (Hardcover) $125.76 The baby is crying, and his animal friends try to figure out how to make him stop. Is he hungry? Does he want a bath? Could he want to play? Despite all these good ideas, the baby just keeps crying. Will the animals ever discover what the baby really w...

Windows 7 Inside Out (Paperback) $31.18 Explaining how to use the new features of Windows 7, a comprehensive manual details hundreds of timesaving solutions, troubleshooting tips, and workarounds, along with information on such topics as Internet Explorer 8, Windows Media Center, networking,...

Windows Server 2008 Resource Kit $155.92 Description not available.

Microsoft Windows Vista $90.57

Mastering Windows Server 2008 R2 (Paperback) $37.41 The one book you absolutely need to get up and running with Windows Server 2008 R2. One of the world`s leading Windows authorities and top-selling author Mark Minasi explores every nook and cranny of the latest version of Microsoft`s flagsh...

Windows 7 All-in-One For Dummies (paperback) $22.62 255 characters or less!

Absolute Beginner`s Guide to Computer Basics (Paperback) $14.8 Everything casual users need to know to get the most out of their new Windows 7 PCs, software, and the Internet   The best-selling beginner's guide, now completely updated for...

Mcitp Selfpaced Training Kit (Exams 70431, 70443, 70444) $87.31 Description not available.

Iphoto 6 $22.56 To compensate for the lack of a manual accompanying version 6 of iPhoto image management software for the Macintosh, Pogue (the weekly New York Times tech columnist) and Story (a professional photographer) offer a crash course on digital photography an...

New Perspectives On Microsoft Windows Xp $91.38 Description not available.

Microsoft Windows XP $98.85 Microsoft Windows XP: Comprehensive Concepts and Techniques, Service Pack 2 Edition, part of the highly successful Shelly Cashman Series, offers a clear step-by-step, screen-by-screen approach to learning Microsoft Windows XP.

Windows 7 Resource Kit (Paperback) $43.65 Description not available.

Microsoft Window Vista $16.98 This fast-paced, no-fluff book teaches you the basics of Microsoft Windows Vista and includes tips, shortcuts, and workarounds for Windows veterans as well as new users, whether you're using the Home, Business, Enterprise, or Ultimate edition of...

Unix in a Nutshell $23.54 In this update of the 1999 edition, a US programmer now living in Israel traces the evolution of the Unix operating system. Robbins treats its latest incarnations in Mac OS X, GNU/Linux, and Solaris 10. For programmers and users, he overviews the comma...

Mastering Vmware Vsphere 4 (Paperback) $37.41 Description not available.

Linux in a Nutshell (Paperback) $31.18 The latest edition of this popular reference offers a tighter focus on Linux system essentials, as well as more coverage of new capabilities such as virtualization, wireless network management, and revision control with git. In short, everyth...

Operating System $13.54 Buy and sell [Operating System] at great prices.

Divine Operating System $12.47 Divine Operating System

Learning The Unix Operating System $17.35 Learning The Unix Operating System

Operating System: Concepts and Techniques $20.76 Operating System: Concepts and Techniques

Operating System Concepts With Java $125.59 Operating System Concepts With Java

Upgrading the Operating System $14.99 Upgrading the Operating System

Operating Systems: Operating System, History of Operating Systems, List of Operating Systems, Comparison of Operating Systems $14.14 Operating Systems: Operating System, History of Operating Systems, List of Operating Systems, Comparison of Operating Systems

Operating System Concepts $90 Buy and sell [Operating System Concepts] at great prices.

The Pick Operating System $18.89 Buy and sell [The Pick Operating System] at great prices.

Upgrading The Operating System $9.86 Buy and sell [Upgrading The Operating System] at great prices.

Operating System Design $50.4 Buy and sell [Operating System Design] at great prices.

The Gem Operating System $13.11 Buy and sell [The Gem Operating System] at great prices.

The Unix( Operating System $26.38 Buy and sell [The Unix( Operating System] at great prices.

The Integral Operating System $18.69 Buy and sell [The Integral Operating System] at great prices.

Encyclopaedia Of Operating System $116.53 Buy and sell [Encyclopaedia Of Operating System] at great prices.

WEBSITE COMPLETE ACCSWEBSITE OPERATING SYSTEM $45.94 WEBSITE COMPLETE ACCSWEBSITE OPERATING SYSTEM

Formal Refinement for Operating System Kernels $76.5 Formal Refinement for Operating System Kernels

Introduction to Operating System Design and Implementation $43.6 Introduction to Operating System Design and Implementation

Building a Real Time Operating System $48.45 Building a Real Time Operating System

The Design And Implementation Of The Freebsd Operating System $67.89 The Design And Implementation Of The Freebsd Operating System

OSP: An Environment for Operating System Projects $32 OSP: An Environment for Operating System Projects

Computer Dictionary - What Is An Operating System or OS