You’ve decided to purchase property with the intention of earning a return on the investment either through rental income, future resale, or both. Key calculations can help determine if the property will be profitable or what will be required to keep your investment operational and keep your cash flow positive.
Net operating income is used to determine the value and profitability of an income-generating property where. NOI is typically calculated by subtracting the yearly property expenses from the annual income it produces. NOI is based on hard data, which isn’t subjective or easily skewed to suit individual interests; this can help you, as an investor, arrive at a fair value for the property. It should also be noted that NOI is not the only important factor or calculation to consider when running your numbers on an investment property.
Operating Income – Operating Expenses = NOI
The property’s income may include rent, parking fees, amenity fees, vending machines, laundry facilities Etc.
The property’s expenses included in the NOI calculation are insurance premiums, any utilities which the landlord is responsible for, property taxes, management and repair costs. These expenses will vary according to the property type, age, size, Etc.
One-time capital expenditures (Capex), money that is used to upgrade the physical assets such as a new roof or boiler system, are not included as a repair expense in the NOI calculation, nor are any financial obligations such as mortgage payments to the property owner may have.
NOI is one of the most important calculations for an investor to consider when purchasing a property and developing its budget. An accurate NOI can help investors compare the subject property against other nearby properties and assist lenders in assessing the risk associated with the property. Real estate appraisers, mortgage brokers and investors may use the NOI to determine the value of a property through the capitalization rate or cap rate.
NOI divided by the Purchase price or current market value = Cap rate
The cap rate is calculated by dividing the NOI by the property’s current market value, expressed as a percentage such as a 5% cap rate or a 5 cap. The cap rate makes it possible to compare the value of properties in the local market. Many factors may impact the cap rate, such as location, market size and asset stability. Typically, a lower cap rate indicates that the property represents a higher valuation and a better prospect of returns with less risk.
For example, two comparable properties, one in an A+ neighbourhood, would have a lower cap rate than the same property in a D neighbourhood.
As an investor, developing your property to its highest and best use is vital. By doing so, you will maximize your cash flow and the value attached to the property. Property owners can manage the NOI of a property by cutting back on expenses or increasing its earnings. This can be achieved by increasing rent, adding bedrooms, minimizing operating expenses and charging fees for amenities and services.
Managing your investment properties efficiently will help to maximize returns and add value. This is immensely important to your ability to continue to grow your portfolio.
Ensuring your real estate agent has experience in investment properties can help you better identify profitable areas worth investing in, what kind of roadblocks you might expect, and how to navigate them. Our team is ready to help you; reach out today.
