Hello, this is Ron Henderson, President & Broker of mres in los angeles. This video is part of a series on how to evaluate investment properties. As an investor of real estate, you have to know the language, math and different evaluation techniques that we use to compare one potential property to another, or a property compared to other types of investments. we can use these tools to make determine what it’s value is as a buyer, seller, or lender.
The net operating income, or NOI, is the net revenue derived by subtracting the expenses from the gross income, not including the debt service, or mortgage payments. This number is required as part of the calculations to determine several of the primary evaluation techniques like cap rates, and debt to coverage ratios and post-purchase strategies. Gross income can be the combination of rents, laundry, parking, etc. Expenses include property tax, insurance, maintanenace & repairs, property management, utilities, gardening, pool service, advertising, city rental registration, hoa dues, supplies, and an estimated vacancy reserve.
The vacancy reserve percentage can be either be a specific required amount a lender may want to use, or an amount that would be typical for an area. Realistically vacancy levels in the San Fernando Valley right now is running around 5%, but some lenders are conservative and using 10% to cover their rears. In our example we’ll use 8%, just to split the difference.
Here’s an example of a small 6 unit residential property with a unit mix of 2 studios, 2 1+1s, and 2 2+2s.
The rents we’ll use will be $1100 mo. for the studios, $1200 for the 1+1s, and $1400 for the 2+2s. that gives us a scheduled gross annual income of $88,800. There are 2 schools on deducting the vacancy reserve. adding it to the expenses, or subtracting it from the scheduled income, before dealing with the direct expenses. I’m going to subtract the 8% vacancy $7104, from the $88,800 scheduled income, and that gives us a gross operating income of $81,696.
The expenses we’ll use will be $11000 for property taxes, $2500 for insurance, $5500 for property management, $1500 for gardner, $2000 for owner paid utilities, $2000 for maintainance /pest control & city rental registration. that will give us $24,500 in annual operating expenses. Now basic math, scheduled annual income of $88,800, minus $7104 vacancy, gives us an operating income of $81,696, minus the $24,500 expences, gives us $57,196 in net operating income, or NOI.
In upcoming videos I’ll be showing how we use the NOI in various evaluation techniques to determine if a property is a good buy, how much it should be listed for, or how much loan you can get against it. If you’re in the Los Angeles region, and have any specific questions, always feel free in contacting me through my website mres.com or the email address or phone number shown below.
www.mres.com Multi Real Estate Services – Ron Henderson describes the commonly used techniques used to evaluate real estate investment properties. These tools are utilized by buyers, sellers, and lenders – This video details the Net Operating Income (NOI)