Net Operating Income (NOI) is an important figure to know when purchasing income property. It is simply gross annual rental income minus expenses (GROSS ANNUAL RENTAL INCOME – EXPENSES). What can sometimes not be so simple is defining what qualifies as an “expense.” Here is a list that you can use to define your expenses:
- Property Taxes
- Homeowners Insurance
- Trash Pickup
- Management Fees
- Yard Care / Snow Removal
- Maintenance & Repairs
- Vacancy and collection losses
- Reserve fund
Some of these items vary from year to year (i.e. maintenance & repairs), and some of these items are an amount that you set yourself (i.e. reserve fund). Because of these variable costs, your calculation of NOI might be different from somebody else. The important thing is that you always use the same numbers for your properties and properties that you are looking to buy. That way it will be consistent and you will be able to compare properties appropriately.
Also of note, Net Operating Income is not necessarily the same as Cash Flow. This is because NOI does not consider any mortgage payments that you might have.