What is the NOI?

What is your NOI?

No I am not talking about some random high school test you took to officially get your diploma either.

The NOI or “Net Operating Income” is an accounting term. The NOI refers to the bottom line of the profit and loss statement. Simply put in commercial real estate, the NOI is equal to the effective gross income minus all the operating expenses. That number results in your NOI.

For the type of real estate Sarah and I purchase the NOI is a key metric. I would say it is second only to the Cash Flow. The NOI will determine how much the property cash flows! The NOI is in essence the gate keeper to your cash flow. A higher NOI more cash flow a lower NOI less cash flow.

Did you know the bank will want to know what your NOI is also? You see the NOI determines how big of a loan the property can support. In turn this also determines how much the property is worth!!!

Now do I have your attention? The NOI of a property is like the quarterback and dictates whether you have a positive cash flowing property or not.

So, how do you increase the NOI? 

You could decrease the expenses on the property. Maybe you install energy efficient lights, low flow toilets and low flow faucets to reduce the water bill. On a 16 unit apartment building that adds up over the year the expense budget for your utilities is lower and thus the NOI has been increased.

Another option could be to find ways to make more money. Maybe you incorporate a valet trash on the property or convert unused garages into storage units for the property. These are common ways investors can improve the NOI by adding value to things and generating additional income outside of just rent. 

The third and most common way to improve the NOI is usually done through renovating units and/or raising rents. If I have 16 units with an average monthly rent of $1,200 and I increase rents by $250 over 5 years I have added an additional $48,000 to my NOI which will definitely be noticed in my cash flow. The value of the property will also have increased at that time as well.

So, the NOI is key:

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1.) It will determine what size loan you can get.

2.) How much the property is worth!

~ Sean

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