There are several reasons that understanding ‘net operating income’ is vital to a healthy property management business.
Net Operating Income (NOI) is the life-blood of any real estate business. Any misconceptions on this subject will threaten both the profitability of the venture and the sanity of the property manager.
What is NOI?
Simply stated, NOI is the annual income generated by a particular property after all expenses are deducted. But within that simple definition, there lie a few crucial variables.
Effective Rental Income
Start with finding the Effective Rental Income. That number is derived from subtracting the vacancy and credit losses from the potential rental income. If there are any other income sources from this property, they are added to effective rental income to get the gross operating income. Then all operating expenses are subtracted to get the Net Operating Income.
For our purposes, these numbers can be either historical or projected into the future.
Why is NOI so important?
So, why is the NOI so important? The NOI allows property owners and managers to wrap their arms around the income potential of a piece of property. Some investors like the ‘cash flow before tax (CFBT)’ formula as tax considerations are built-in to each venture. We believe in establishing the NOI first since that keeps the information property-based and not investment-based.
Just to clarify:
Potential Rental income is the sum of all rents under each lease. This assumes full occupancy.
Vacancy and Credit Losses is the income lost due to vacancy or defaulting on payments.
Effective Rental Income is the amount an owner can safely expect to receive after vacancy and losses are considered.
Other Income is income in case a property charges additional fees above rent.
Gross Operating Income is the total of all of the above before we consider operating expenses.
Operating Expenses are all cash expenditures to manage the property. Including but not limited to: taxes, insurance, management fees, maintenance, utilities and professional services.
Net Operating Income then is the final total.
Safe Harbor Property Management has been involved in real estate management for decades. We can help the newest property owners or the most tested veterans navigate their way towards profitability. This is a simple overview, and we would love to talk to you further about your reality.
Please don’t hesitate to give us a call or fill out the contact us form to reach us for more help today.