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How to Calculate Net Operating Income | What Is NOI Explained Briefly - YouTube
Channel: Trevor Calton
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In this lesson we're going to talk about
Net Operating Income or NOI.
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NOI is the driving number behind the valuation of commercial real estate and it's
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important to understand where that
number comes from, how it's used, and the
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significance that it has over our investments.
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Net Operating Income is exactly that.
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It's the net income from operations
after all of the operating
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expenses have been paid.
So if this is our total revenue and then we have our
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expenses, this is our NOI.
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Now, NOI can be used for a lot of things.
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For instance, if we take our NOI and we divide it by our purchase price (or value),
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that gives us our Cap Rate.
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NOI can also be used to calculate
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if we take our annual debt service, our
NOI divided by our annual debt service
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that gives us our Debt Service Coverage Ratio.
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And finally since NOI is what we use to
pay our debt service, if we take the NOI
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minus the debt service, that gives us our Net Cash Flow, which we can use to calculate
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our Cash-on-Cash return.
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Here are the steps to calculating the NOI on a property.
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First, we need to know what our
Scheduled Rents are. Scheduled rents are
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the rents that would be collected on the
property if all spaces or units were
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completely full 100% of the year.
Effectively, it's the rent roll or the
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lease schedule times 12 months,
for the total annual rents. From there, most of
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the time, we have an assumed vacancy.
Vacancy can be variable depending on the
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market however most of the time we
must assume that some vacancy is
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going to happen, and the industry
standard, for at least multifamily
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vacancy or most investment properties, is
5%.
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From there we also get Other Income.
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Other Income can be laundry income,
application fees or credit check fees,
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late fees, non-sufficient funds, anything
that isn't part of the rent roll but
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it's still income to the property.
And if we add these (obviously this is a
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negative, so we would subtract that) and
add that, we get our
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Effective Gross Income.
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Effective Gross Income, or EGI, is
basically our net revenue number.
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From there, we need to take out Operating
Expenses. Important note is that
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operating expenses do not include debt
service or payments to the owner,
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but they are expenses that are related
strictly to the operation of the property.
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So, for example,
operating expenses would include things
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like real estate taxes, hazard insurance,
property management, utilities, repairs
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and maintenance. Anything that is
necessary to operate the property along
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with collecting the rents, are considered
operating expenses. Those would be our
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total expenses. And then, if we take our
Effective Gross Income minus our total
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Operating Expenses, we get our NOI.
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