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Real Estate Investing 101: Understanding NOI

August 14, 2008 by Benjamin Bach · Leave a Comment

Real Estate Investing can appear complicated at first, if you don’t understand all the jargon that experienced Investors (or those that try to sound experienced) use on a daily basis.

Today, I’ll be explaining what the <b>NOI</b> - or Net Operating Income - is, and why you need to know what it is before you start acquiring investment properties in the Waterloo region.

When you’re buying a house, apartment building or any piece of real estate as an investment to generate cash flow, you need a way to determine what the income is. If you don’t know this, you won’t understand how much, if any, cash flow this particular rental home will generate for you.

Net Operating Income is simply the property’s operational revenue <b>less</b> operational expenses.

Operational expenses are expenses that are incurred by virtue of owning and running the property. Operating expenses include water, gas, hydro, utilities (if paid by the owner, not the tenant) as would the Property Tax, normal Maintenance & Repair, cost of insurance etc. It usually will not include mortgage payments - or debt service payments as they are often called.

For example. You own a rental property in Kitchener Waterloo, Ontario that is rented for $2,000 a month. The property tax is $200 a month, the tenants pay all utilities, Insurance is $75 a month, and Maintenance and Repair is budgeted at $50 a month (all numbers have been pulled from thin air by me). You manage the property yourself, so you don’t incur a management fee.

Your Gross Rental Revenue is $2,000 x 12 (months) = $24,000
From this we deduct a vacancy allowance of 5%, or 1200

Net Rental Revenue = 22,800

Operating Expenses:
Annual Tax = 200 x 12 = 2400
Insurance = 75 x 12 = 900
Maintenance = $50 x 12 = 600

Total Operating Expenses = 3900

Net Operating Income = 22800 - 3900 = $ 18,900

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