The Importance of a Property’s Net Operating Income
In the previous article, I showed an example on how to compute the net operating income (NOI) of a property. Expenses such as property insurance, property managament, taxes, and repairs have to be considered. In addition, some allowance for vacancy and collection loss have to be accounted for. Some properties, which may look very attractive at first, may have a low, or worse, negative NOI and may not be a good investment after all.
If you are buying a property thorugh bank financing, then computing the NOI is also important to see the net cash flow the property generates while you are still paying off the loan. This is also a great tool in comparing a property investment versus alternative instruments such as stocks, bonds, and mutual funds.
Note however that the NOI is just a rough guide that you can use in determining if a property is a good investement. The soundness of your decision is highly dependent on the accuracy of your assumptions. It is therefore important to make your assumptions as accurate as possible. How?
Go to the municipality and ask for the latest tax rates of properties located in the area. Get several quotes from insurance companies to get a rough estimate of annual insurance premiums. Ask the neighborhood or property owners nearby how often the units are vacant. Also, make sure to screen your tenants well to ensure a worry-free collection.
As mentioned in previous articles, reaping off the rewards from your real estate investment may take a long time and will involve lots of effort. Nevertheless, I’m sure that by the time you get there, you’ll never regret that you chose to take that first step towards having your own real estate investment.