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Real Estate Math Video #12 - Calculating Net Operating Income (NOI) | Real Estate Exam Prep - YouTube
Channel: The Real Estate Classroom
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hey everyone my name is paul pachelski
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and welcome to the real estate classroom
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youtube channel in today's real estate
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exam prep video we're going to discuss
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calculating the net operating income or
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sometimes referred to
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as an noi
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it's very important that you have to
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know this for your real estate licensing
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exam because
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it is uh for two reasons number one it
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really is the
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this formula is the part of the formula
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for the
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foundation for analyzing investment
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properties and number two is
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the net operating income or that noi
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is one of the three key values
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that we need for the capitalization
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formula
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and i did a previous video on how to
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calculate or use that capitalization
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formula
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i'm going to put a link right up here in
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the upper right hand corner i highly
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suggest that you at some point take a
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look
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at that because this builds into that
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you have to know how to
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calculate that net operating income and
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it's pretty easy to do and as you can
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see
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i have the the capitalization formula on
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your screen which is the net
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operating income or the noi divided by
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rate equals
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value and again check out the video in
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the upper right hand corner
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alright so let's kind of go over how we
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calculate this net operating income
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number one is there are basically five
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steps
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to get to what we need number one is we
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take the potential gross
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income of this property and what i mean
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by that
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is assuming that all
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50 bays in the or all 50 bays in this
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strip mall or
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all 50 apartments in this apartment
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community
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assuming that every single unit is
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rented for the entire 12 months that
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gives us the potential gross income
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again there's an assumption that all
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units have been
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rented for the full 12 months that's the
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potential gross income or what we call
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the
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pgi then we have to subtract
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the actual vacancy losses or collection
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losses
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if we have a 50 unit bay or 50 50 unit
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apartment community
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and 10 of those units
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were rented that's a collection loss we
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weren't collecting any revenue
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so we take the potential gross income we
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subtract the vacancy loss
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that gives us what's called the
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effective gross income
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then we take the effective gross income
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in step four
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and we subtract our operating expenses
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now operating expenses are simply
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those expenses that we incur to run our
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business
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things like our rent renting our office
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salaries for employees
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insurance benefits utilities property
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taxes
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vehicles all of those things are
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considered operating expenses
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we take the effective gross income we
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subtract the
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operating expense that gives us
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our net operating income or we call the
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noi
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that's that key calculation that we need
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for the capitalization
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formula now notice on your screen there
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i have in parentheses
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it's annual every one of these
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values here are annualized
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all right potential gross income is the
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annual
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potential gross income the annual
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vacancy loss
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uh the annual operating expenses
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just remember that when you're
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calculating the noi
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it's annualized now notice on your
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screen
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uh for for most of you people for those
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taking the sales person's exam and most
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exams you can stop at step five but
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every once in a while
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depending on which which test testing
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company
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uh is providing your your real estate
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exam
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they'll ask for six and seven and so
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particularly in the brokers exam so if
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they want to know how to calculate the
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before tax
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cash flow this is how you do it you do
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it the exact same way that you did your
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noi
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but we're just gonna add step 6 which is
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we take the net
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annual operating income and we subtract
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the
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annual debt service and that gives us
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our annual before tax cash flow it's
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really that simple
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and i've had a couple of students say
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that they have
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they've had this particular question on
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their broker's exam so i wanted to make
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sure that i
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included that in this video all right
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let's kind of
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put this to practical use here so let's
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figure out our net annual operating
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income so we have the potential gross
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income and here's our example we have 20
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units
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at 500 a month so we take 20 units
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we multiply that by 500 a month rent
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that's the income
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and then we multiply it again by 12
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representing 12 months
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when we do that that gives us a
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potential gross income
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of a hundred and twenty thousand dollars
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now remember that's annual
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that's an annual income step two we we
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subtract the vacancy loss or collection
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losses
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and in our example let's say that this
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particular 20 unit apartment community
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had a 10
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vacancy remember that's annualized that
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equals twelve
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thousand dollars so we have to take a
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hundred and twenty thousand and subtract
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twelve
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thousand and that gives us what's called
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that effective
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gross income of a hundred and eight
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thousand dollars
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we take our effective gross income and
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we
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subtract the operating expenses and
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again that's annualized our annual
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operating expense and in our example uh
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we have an
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annual operating expense of fifty
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thousand dollars so we take our
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effective gross
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income of a hundred and eight thousand
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we subtract
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the fifty thousand and that gives us
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our net operating income of 58
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000 now for most of us
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in most of our problems that we're going
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to get on our exam
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we can stop right there and plug in that
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58
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000 into the capitalization formula
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however for those maybe broker
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candidates that they want to know the
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before tax we have to we'll just
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continue on we'll take our net operating
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income subtract the annual debt service
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and in our example it they it gives
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three thousand dollars a month for our
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debt service but remember it's
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annualized so we're gonna have to take
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that three thousand and multiply it by
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twelve months
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that gives us thirty six thousand
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dollars so we take our noi
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of 58 000 minus our debt service of 36
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and that gives us our before tax cash
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flow of
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22 000 now
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another thing i put on here is every
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once in a while
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and i mostly seen this with the amp test
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the before tax cash flow is sometimes
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known as
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a cash throw-off i don't know why but i
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wanted to let you know
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that as well okay if you're going to
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continue studying for a real estate exam
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check out this real estate math exam
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problem and if you have not subscribed
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to the channel please do so click little
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circle right there comments and
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questions down below
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see you all in the next video
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