In any business, the net operating income (NOI) is a vital measure of a company’s performance and is a clear indication of whether the company has made profits from its operations. The net operating income is defined as the company’s income after all expenses related to operations such as cost of goods sold and employee’s salaries are deducted.
Similarly, real estate properties that are used to generate rental income such as multi-door apartments, duplex, and condominiums also incur operating expenses like real property taxes and maintenance costs. Below is an example of how NOI is computed.
Example. You have found a beautiful 8-door apartment where the monthly rent per unit is $125.
Real Property Taxes = $750/year
Property Management = $120/month
Property Insurance = $300/year
Allowance For Repairs and Maintenance = $70/month
Vacancy Rate = 10%
Collection Loss (assume not all tenants will be able to pay) = 3%
For this particular example, you will be earning a little less than $600 per month net after paying off your mortgage. Therefore, this looks like a good deal for you as it will put additional money in your pockets. Of course, reaping the benefits will take some time as you have to finish paying the monthly amortizations first.
In the next article, I will show why it is vital for you to compute a prospective property’s net operating income.