Adapted from the December 2023 PREP Newsletter: "So What Does That Mean in Plain English?"
When prospective real estate deals are evaluated, it is important to continuously monitor the Net Operating Income, or NOI. It is the key value on the financial statement that indicates whether a property can provide strong cash flow to investors, and if not, then it makes sense to pass on the investment altogether. Simply put, the money in (Total Rental Income) less the money out (Total Operating Expenses) gives you your NOI. But we real estate people don't like things “simply put;” we need fancy terms and equations, No Offense Intended😉.
The bulk of “money in” is the Total Rental Income, and calculating it requires using a bit more data. Realistically, not all apartment units of a property are fully occupied every day of the year and at the highest market rents - nor should they be - and this must be accounted for. Sometimes, concessions are given, due rent is not yet paid, or tenants have a lease with the lower rent from the six-months-ago market. For the “money out,” not all expenses are equal. Some expenses vary based on performance or occupancy, and some costs are not included in the NOI altogether. These permutations, and more, must be factored in when churning out a final NOI number.
NOI, while on the surface can seem like a plug and chug subtraction formula, is a vital metric that can make or break the profitability of any real estate deal at any moment.
Written By:
Donny S. Steinberg
Director of Strategy & Innovation
